Deutsche Bank Markets Research Industry Indian Railways Date 26 April 2013 Asia India Transportation Infrastructure F.I.T.T. for investors All green & finally leaving the station: Get ready for the Indian railway boom Keep buying L&T and UltraTech into the investment cycle After many years of painful waiting, we expect Indian Railways to finally start placing a series of orders totaling USD40-50bn over the next 18-36 months. This order programme, which has the wider goal of developing 60,000sqkm (2% of the total country) with additional spends of USD100bn, could also serve to kick-start the broader investment cycle with ramifications across India Inc. Investors have been disappointed before but our extensive field checks suggest low risk of push-back ahead of the upcoming elections. We recommend buying L&T and Ultratech into this programme (we lift our L&T TP to top-of-Street) but also like later-cycle beneficiaries NTPC, Coal India, and Adani Ports. Manish Saxena Research Analyst (+91) 22 7158 4034 [email protected]Chockalingam Narayanan Research Analyst (+91) 22 7158 4056 [email protected]Abhishek Puri Research Analyst (+91) 22 7158 4214 [email protected]________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.
Transcript
Deutsche Bank Markets Research
Industry
Indian Railways
Date 26 April 2013 Asia India Transportation Infrastructure
F.I.T.T. for investors
All green & finally leaving the station: Get ready for the Indian railway boom Keep buying L&T and UltraTech into the investment cycle
After many years of painful waiting, we expect Indian Railways to finally start placing a series of orders totaling USD40-50bn over the next 18-36 months. This order programme, which has the wider goal of developing 60,000sqkm (2% of the total country) with additional spends of USD100bn, could also serve to kick-start the broader investment cycle with ramifications across India Inc. Investors have been disappointed before but our extensive field checks suggest low risk of push-back ahead of the upcoming elections. We recommend buying L&T and Ultratech into this programme (we lift our L&T TP to top-of-Street) but also like later-cycle beneficiaries NTPC, Coal India, and Adani Ports.
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.
Deutsche Bank Markets Research
Asia
India
Transportation
Infrastructure
Industry
Indian Railways
Date
26 April 2013
FITT Research
All green & finally leaving the station: Get ready for the Indian railway boom
Keep buying L&T and UltraTech into the investment cycle
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.
After many years of painful waiting, we expect Indian Railways to finally start placing a series of orders totaling USD40-50bn over the next 18-36 months. This order programme, which has the wider goal of developing 60,000sqkm (2% of the total country) with additional spends of USD100bn, could also serve to kick-start the broader investment cycle with ramifications across India Inc. Investors have been disappointed before but our extensive field checks suggest low risk of push-back ahead of the upcoming elections. We recommend buying L&T and Ultratech into this programme (we lift our L&T TP to top-of-Street) but also like later-cycle beneficiaries NTPC, Coal India, and Adani Ports.
No longer unloved: Railways now politically/economically desirable Over the last six decades, Indian Railways has suffered from a lack of political interest and consequent under-investment – for example, over this period annual track additions by Indian Railways have trended below 1% CAGR. This is all set to change, as Indian Railways is key to the development of the dedicated freight corridor (DFC) and Delhi Mumbai Industrial Corridor (DMIC). As such, it has prepared a coordinated programme to build: a) 3,300km of high speed trunk freight routes; b) 5,500km of feeder routes along with PSU/private players; and c) develop seven industrial clusters around 1,500sqkm of western rail corridor. This is the first time we have seen such preparedness at the beginning of a project. Furthermore, these projects have widespread support as they are seen as key to improving user costs and improve overall efficiency.
This time it’s real: Preparations already relatively advanced Any follower of the Indian railway sector is forgiven for immediate cynicism especially as potential impediments include: a) eight state and national elections over the next year; and b) delays in land acquisition or financial closure. But our confidence is underpinned by: (a) there is definite momentum as financial closures already achieved with three tier approvals involving the World Bank, Japanese Int’l Corp Agency, Central and State Governments, and (b) over the last 20 years few projects have been scrapped after such tie-ups; and b) DFC/DMIC have already acquired 98% of land required for projects slated for award over the next 12-18 months. For PPP routes, Indian Railways have 90% land in possession and are now offering returns that can match the best in infra space.
E&C and cement companies are early-cycle beneficiaries We recommend investors position now ahead of the expected order announcements. We particularly like L&T and UtraTech Cement. For L&T, we now believe that FY14 new orders could be up 25% vs. consensus expectations of a 10-20% decline and lift our target price to INR2,045. For UltraTech, we have raised FY15E profit by 7% and reiterate Buy with INR2,100 target price. Valuations are detailed within this report (see pages 10-13), and key risks to our positive investment thesis include politically induced delays, high competition for orders and higher-than-expected programme costs.
Appendix A: Indian Railways programme shows it has learnt well from the experience of other sectors ........................................... 79
Appendix B: Viability of DFC funding ........................................... 84
Appendix C: DMIC a game changer ............................................. 87
Appendix D: Dholera – Being created on similar lines as Singapore ...................................................................................................... 89
Appendix E: What is the state of rail finances? ............................ 90
Appendix F: Comparison of railways with other modes of transport ....................................................................................... 95
Appendix G: Important stages under land acquisition ................. 97
Appendix H: China and India –a quick comparison ..................... 98
NHPC Mar. 22 Hold 266,926 10.3 9.6 9.7 8.9 0.8 0.8 8.4 8.6
Power Grid Mar. 110 Hold 461,710 11.7 10.1 8.7 7.7 1.7 1.5 15.9 15.7
Reliance Power Mar. 75 Sell 209,403 21.5 11.3 16.6 10.4 1.1 1.0 2.3 2.6
Tata Power Mar. 95 Hold 224,752 18.2 15.7 9.2 7.9 1.6 1.5 9.1 9.9
Coal India Mar. 312 Hold 1,967,863 13.1 10.2 6.2 4.0 3.5 2.9 28.6 31.2 Source: Bloomberg Finance LP, Deutsche Bank. Prices as on Apr 23, 2013
26 April 2013
Infrastructure
Indian Railways
Page 4 Deutsche Bank AG/Hong Kong
Executive summary
Our bottom-up analysis suggests USD40-50bn of rail orders over FY14-16E
We have carried out detailed estimates of the capex roll-out of India’s most ambitious and probably biggest greenfield project, i.e. the Dedicated Freight Corridors.
Our estimates, based on detailed bottom-up projections, suggest that the total spending will be USD40-50bn – just for constructing the core rail infrastructure for dedicated freight corridors, feeder routes (first and last mile connectivity) and conducting some basic work on the Delhi-Mumbai Industrial Corridor. It is important to note however that although there is significant focus on the railway roll-out of the DFC, the programme is not just about building an all-new trunk route to help alleviate serious rail line constraints, but a programme that has the potential to drive and kick-start a sustained investment cycle and give substantial cost benefits to end-users.
The entire programme can be divided into the following components:
Firstly, the two high-speed trunk routes of 3,300km (one between New Delhi & Mumbai and the other between Ludhiana & Kolkata) at a cost of approx. USD20bn: This programme has already achieved key milestones, including land acquisition (>70% completed), environmental clearances, finalisation of engineering design specifications, financial closure etc. Most of this programme is taking place through the EPC tendering route and will be awarded in early FY14E.
Secondly, Indian Railways has unveiled 4,500km of first and last mile connectivity projects for the use of beneficiaries to gain access to the DFC. Land for this project is owned by Indian Railways and ordering is set to commence in FY14E. These tracks, like the DFC, are being designed to handle a 25-tonne axle load (20% higher than current) and are also being electrified.
Thirdly, the projects being undertaken through the public private partnership route are being kick-started by the cash-rich PSUs such as Coal India, NTPC and the top developers for installing new line networks (c1,500km) so as to improve their evacuation/supply of raw material/finished goods. The key point to note in this case is that Indian Railways is promising private/public developers (defined beneficiaries) a solid return (no risk of returns being capped in the future) – a promise last seen in Indian infrastructure when the first of the road, port and power concessions were awarded, thereby making it probably the best concession offered currently. Based on our feedback from field trips, we envisage a good level of interest across the user industries – and the programme is likely to kick-start in FY15E.
Lastly (and most importantly), progress has been made for building core infrastructure in seven new cities and nine investment zones as a part of the USD100bn Delhi-Mumbai Industrial Corridor programme. The ordering in this programme is likely to begin in FY15, and the key point to note is that the latest annual budget has announced that this is the only new project to receive unequivocal support from the Finance Ministry. Moreover, preparatory work for developing a fresh 1000km of new industrial belt in UP along the eastern corridor is also being announced.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 5
Figure 2: Massive investment to the tune of INR2.4tr is expected
DFC Alignment, INR958bn, 40%
Fedeer Line, INR467bn, 20%
Government infra built out under DMIC,
INR950bn, 40%
Total Investment INR2.4trn
Source: Ministry of Railways, DFCCIL, Deutsche Bank
As can be seen in Figure 3, we expect the entire DFC capex to be completed by FY17, with the bulk of it being undertaken during FY14E and FY15E (when approximately 1,500km of line is expected to be awarded in each of the periods). As far as the feeder routes are concerned, we expect the projects to kick-start in FY14E and be completed over a six-year period in FY19E.
% of Phasing 0 1 0 1 1 4 12 15 11 18 16 21 Source: Deutsche Bank estimates
Our confidence on rollout stems from series of irreversible steps
Our field trips to meet government officials, project implementation teams as well as equipment suppliers suggest that consensus worries of fresh awards getting delayed either on account of political uncertainty or funding constraints appear misplaced. What is important to note is that unlike all other infrastructure roll-outs, the build-out by Indian Railways is a well thought-out plan. Key elements that give us confidence are:
1) A constitutional amendment has made land acquisition seamless for special projects such as the DFC.
a) For projects on dedicated freight corridor that are being awarded in FY14E, 98% of land has been acquired vs. requirement of 80% as per tender notices.
26 April 2013
Infrastructure
Indian Railways
Page 6 Deutsche Bank AG/Hong Kong
b) The feeder routes/DMIC projects do not qualify as special projects, but for awards that are targeted to be ordered in FY14E, 100% of land parcels are already in possession.
2) Financial closure for the USD20bn DFC project as well as the tie-up of USD4.5bn funds for DMIC were completed in the latest budget.
3) Unlike the historical practice of awarding contracts based on an itemized bill of contracts, the DFC and DMIC projects are based on the FIDIC system of international tendering, making the process largely seamless in nature.
4) Targets for contract awards are well defined and FY14 seems to be an inflection year for new awards.
5) Railway offerings in PPP seem to incorporate past experience from other infrastructure sectors’ concessions.
a) In the latest Indian Railways policy, returns are not capped for PPP projects and it is also offering support to help augment land acquisition.
b) In the case of the DMIC project, the core infrastructure (water, power, sewage, roads, etc.) in the industrial zones will be tendered out by the government through EPC, while the development of usage will be tendered out through PPP mode.
Figure 4: Four pillars of factors of production and where we stand
Source: Dedicated freight corridor corporation of India, Delhi Mumbai Industrial Corridor, Ministry of Railways, Deutsche Bank
Land
* 73% completed for DFC
* DMIC land acquisition requires state support
* Feeder routes are designed for private sector participation. Railways have stated that already have major portions in initial project tranches
Labour
* DFC is being built on the Yellow book standards wherein the project execution responsibility is with the EPC contractors
* DMIC and Feeder routes are largely through PPP contracts
Capital
* DFC - Financially closed through a mix of equityfrom Government of India and STEP loans from multilateral agencies
* Feeder Routes are offering uncapped returns for defined beneficiaries over a period of 25+ years
* DMIC has a commitment from JICA for debt funding
Organisation
* DFC - Indian Railways is the sole owner and customer raising issues of conflict. Current management structure based on functional classification.
* Feeder routes - Indian Railways is the sole operator; unlikely to result in regional monopolies
Preparedness of IndianRailways on their capacity
build-out
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 7
Where are the risks and how serious are they?
Looking at the build-out of GAIL’s gas pipelines in South India (which are now stuck due to a debate between the Tamil Nadu state government and the company), we cannot rule out the possibility of further impediments. At this juncture, the critical red flags appear to be:
Relationship between the DFC and Indian Railways. Currently, Indian Railways is the owner as well as the biggest user which raises the possibility of conflicts of interest.
The corporate structure of the DFC is still a conventional one based on functional classification rather than a programme-based structure, and 85% of its workforce is currently on deputation.
Any changes in law, such as the upcoming GST bill and its implications, as well as unforeseen things such as law and order, natural calamities, etc.
Lastly, upcoming elections in eight states and the national elections.
We believe that these risks are standard across all the infrastructure projects and don’t warrant any specific project-related risk at this point. The relationship between Indian Railways and the DFC should evolve into a win-win situation, as freight forms the bulk of revenues for Indian Railways and it is in their interest to enhance that in every manner.
Early-cycle beneficiaries are EPC companies/cement companies
As India embarks on the rail capex, the early-cycle beneficiaries are civil contractors such as L&T or raw material providers like cement. Unfortunately, track lines for the western corridor leg are being imported from Japan, and accordingly no listed entity in India will benefit. The mid-cycle beneficiaries include companies such as Siemens India, which can provide signalling, at least in the eastern corridor. The late-cycle beneficiaries include all developers, such as Adani Port, NTPC, Coal India, etc. Figure 5 depicts the beneficiaries of railway capex in the country.
26 April 2013
Infrastructure
Indian Railways
Page 8 Deutsche Bank AG/Hong Kong
Figure 5: Railway capex, particularly for the DFC, could have manifold impacts on the
economy
Enablers
Dedicated Freight Corridor
Design Engineering
Engineering consultants
Preparatory civil works
Civil contracts
Cement, Aggregates, Steel
Track laying companies
Electrical Mechanical
O&M equipment
Rolling stock suppliers
Freight Terminals
Logistics providers
Industrial Parks
Material Handling equipment
Port operators
Container lines & handling
Mining companies
Industrial and power players
Ordering for trunk routes
FY14 FY15 FY16 FY17 FY18 FY19
Culmination of DFCs and Start of First and Last Mile
Connectivity
Start of DMIC and LogisticParks
Developer start getting benefit, ordering for new
cities getting build out
Signalling equipment
DFC Feeder routes DMIC
Source: Deutsche Bank
Our top picks are L&T, APSE, NTPC and ULTC
The stocks to highlight with respect to this trend are summarized below.
L&T – Riding on back of rail theme (Buy with 12m target price of INR2,045/sh) Key points of the investment thesis:
An early-cycle beneficiary. We expect 15x growth in new orders for the rail division of L&T in FY14E vs. FY13E to result in new order growth of 25% vs. consensus expectations of a decline in growth. Other swing sectors are expected to be power and roads. Our estimates factor in significant compression in the new order expectations of new buildings and factories (down 40% yoy) and process segments.
Free cash flow to turnaround on (a) low probability of further worsening of NWC/sales, as L&T’s new order pipeline has a far lower cycle time and less risk of cancellation/slowdown, and (b) standalone capex for new facilities has come to an end.
Our 12-month target price (INR2,045/sh) is based on SOTP value, where we have estimated the long-cycle and short-cycle business at 20x one-year forward earnings. The IT business is valued at 10x FY14E, financials at 1.5x P/B FY14E and L&T IPDL at 1xP/B FY13E. Our top of Street 12m target price implies
Analyst: Manish Saxena
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 9
exit P/E of 23x, which seems reasonable as estimates in the forecast period are based on the current low utilisations (below 70%) and operating margins at the lower end of the last five-year bands.
Key downside risks stem from poor order inflows and margin pressure resulting in quarterly earnings disappointment. Based on our earnings model, If revenue from engineering projects is 10% above/below our expectations, standalone EPS could shift by 11% each in FY14E and FY15E.
UltraTech Cement: A repeat of 2004 in H2FY14? (Buy with 12m INR2,100/sh TP) Our Buy recommendation is predicated on:
An early-cycle beneficiary. UltraTech with 43mnt of cement capacity (75% of total sales) catering to regions of the DFC and DMIC is the biggest cement demand beneficiary of the 1100sqkm of area being developed in these regions. Jaiprakash, with 25mnt of cement capacity (70% of its sales), comes a distant second. 5% higher utilisation in the forecast period raises our estimates by 7% in FY14-16E.
UltraTech has also taken a big lead vs. other cement players in investing in logistics, both for handling as well as shipments. With 35% of the total value of cement being related to logistics, the differential in having a vertical integrated structure on sustainable margins is likely to be quite high. A INR200/t lower freight (vs. current freight cost of INR1,200/t) could raise the profitability gap between UltraTech and large cap peers by a further INR200-450/t (vs. current gap of INR0-350/t)
We continue to use an average of 18x FY14E P/E and 10x EV/EBITDA to arrive at our 12-month target price given the current profitability levels. The multiples are at a premium to large cap peers ACC and Ambuja, largely on the back of the company emerging as the industry leader in terms of both capacity and profitability. This is in line with previous cycles, when industry leaders typically commanded a premium to peers. At our target price, the implied EV/t is USD170/t, a 10% premium to the replacement cost of the new units being added at USD155/t.
The key downside risk to our call is widespread price disruptions following weak demand. A 1% rise in cement prices from our estimates could increase/decrease our earnings by 3.9% in FY14E and vice versa.
Adani Ports & SEZ – Ideally placed to capture incremental traffic (Buy with INR172 TP) We remain positive on Adani Ports, given:
A late-cycle beneficiary through better utilisation of port capacity. Firstly, three of APSEZ’s port facilities, namely Mundra (200mnT capacity), Dahej and Hazira (total of 55mnT) are currently working at an average 43% utilisation and are ideally placed to capture the incremental traffic originating from the hinterland to exports and vice versa. Secondly, the promoter company Adani Enterprises (India’s largest coal importer) would get access to a new rail network to ship in a greater amount of commodity imports, especially coal. Lastly, shipping liners would find the faster turnaround of railways to enable them to plan higher container imports; and Adani Port with its high unutilised capacity could well become the first and closest port of call for a large portion of the northern Indian hinterland markets.
Adani Port would also benefit from minority investments in rail SPVs. It currently owns 20% in Kutch Railways and 12% in Bhaurch Dahej lines. These networks offer good returns under rail PPP and we would not rule out the
Analyst: Chockalingam
Narayanan
Analyst: - Chockalingam
Narayanan
26 April 2013
Infrastructure
Indian Railways
Page 10 Deutsche Bank AG/Hong Kong
possibility of Adani Port investing in more such networks – as the current returns offered by Indian Railways are quite attractive.
We estimate our 12-month target price through the SOTP of all port concessions, wherein the concession value of each port is estimated using NPV with zero terminal value. At our target price, the stock would trade at 4.9x FY14E P/B for an RoE of 24-25% in FY14E and FY15E. This seems reasonable to us considering the improving RoE profile being achieved when the port utilisation levels are at 43-49% over the forecast period and the historical range at which the stock has traded. A 5% higher utilisation over FY17E onward raises our target price by 12%.
Key downside risks are (1) delay/pushback in the Abbot Point assets being transferred to the Adani promoter family, resulting in debt remaining elevated in the forecast period and multiples drifting down, (2) consensus downgrades due to low economic activity, and (3) acquisitions at a significant premium to replacement.
NTPC: Back to an era of fuel sufficiency? (Buy with a 12M target price of INR180/sh) Our summary view on NTPC is:
A late-cycle beneficiary through better fuel availability. NTPC stock has underperformed the Sensex by ~20% over the past 12 months, primarily due to 15-16 quarters of earnings disappointment, nil generation growth and a decline in the availability of plant (PAF) − leading to a decline in ROEs and limited EPS growth. While in the near to medium term, improving coal availability from higher coal production would offer respite, building up the freight corridor and PPP lines of Coal India and NTPC could alter the availability paradigm back to 92% levels vs. our long-term forecast of 85%. Our DCF value for this change consequently rises by 7%.
Over the last few years, management’s focus has shifted from new capacity to fuel sourcing. The rise in fuel availability through better rail corridors would allow NTPC to refocus its growth into the core power business. Our estimates factor in book growth of 7%. 2% higher book growth from FY17E raises our DCF value by 3%.
Our 12-month target price is INR180/sh. We have used the average of a three-stage DCF methodology and a target exit P/BV multiple to value the regulated earnings business model of NTPC. Valuations are attractive at 1.4x P/B and 10x PE for a utility model − at a 30% discount to historical averages and ~15-20% discount to comparable regional peers like CLP and Kepco.
Key downside risks include delays in commissioning, cost overruns in new projects, risk to ROEs on lower coal availability and regulatory tightening, if any.
Coal India: Coping with the absence of a robust rail network (Hold with INR345 TP) Our neutral view on Coal India is driven by the following factors:
A late-cycle beneficiary on higher sustainable despatch growth: Dedicated Freight Corridors would give a lot of despatch capacity to Coal India, especially in North India, which forms 40% of current despatches at leads greater than 1,000km.
Secondly, Coal India’s investments in three feeder routes would raise the annual mining capacity by 290mnt (60% of current capacity) over the next five years. According to our life-of-mine DCF, the Coal India value rises by 5%, even if we assume 50mnt of additional production from FY18E onwards.
Analyst: - Abhishek Puri
Analyst: Manish Saxena
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 11
Our INR345/sh 12m target price is based on a combination of life-of-mine DCF and P/E multiple (14x 1-year forward P/E for regulated business and 7x 1-year forward P/E for spot sales). Our reverse DCF suggests that the current price factors in -1% price growth for 3% volume growth, which looks reasonable. Having said that, the upcoming offer for sale could result in price volatility. Accordingly, we maintain Hold.
Upside risk is contingent on the company getting the governing board to revise the regulated prices in line with the cost push. A 1% increase in the regulated sales price enhances earnings by 2%. The key downside risk is the potential de-rating of the multiple with the passing of the proposed Coal Regulator Bill, if investors perceive that the pricing autonomy of Coal India will be taken over by the new regulator. Our sensitivity analysis shows that if the sales volume for FY13E is 2% lower than expected, then FY13E EPS could fall by 4%. Diversion of e-auction coal to the power sector with a regulated price increase of less than cINR150/t could have a negative impact on earnings.
Shree Cement : In the right place at the right time - again (Buy with INR5,100 TP) We like Shree on the following factors
Shree Cement (SHCM), among the mid-cap cement companies, is the biggest beneficiary of the upcoming railway capex for the following three reasons: (a) its upcoming 5mnt expansion in Northern India along the upcoming rail network is timely; (b) its entire operations and key raw material suppliers are also along the upcoming rail network, which will help reduce its logistics and input costs, and (c) its under-utilised merchant power capacity could start to derive operating leverage benefits.
With FCF yields of over 8%, despite sustainable capex, valuations are attractive at an EV/t of USD108 (c.30% below replacement). We value Shree at an exit EV/EBITDA multiple of 7.15x (25% discount to large cap peers) to get our 12-month target price of INR5,100/sh.
An adverse ruling in the competition case and lower-than-expected price rises are the key risks
% Change 0 0 1 0 0 2 0 0 1Source: Deutsche Bank estimates
Analyst: Chockalingam
Narayanan
26 April 2013
Infrastructure
Indian Railways
Page 12 Deutsche Bank AG/Hong Kong
The start of India’s rail capex boom
Firstly, EPC award for main DFC lines is at advanced stages
The Government of India has set quarterly targets for the awarding of the trunk routes. While the first of the parcels of the civil contracts between Khurja and Kanpur has been awarded for build-out, the next series of contracts, totalling 1,442km of civil contracts on the western corridor as well as electrification contracts for c1,000km, are slated to be awarded this year. For most of the civil contracts, the tenders have already been invited and the process should kick off in this financial year.
Figure 8: First of the big ticket orders have been ordered and a lot more in pipeline
Mumbai
DFC Line (Parallel)
Delhi
Dankuni
Ludhiana
Vasai Rd
Valsad
VadodaraAhmedabad
Mehsana
Palanpur
Marwar Jn
Phulera Tundla
Rewari
Bhaupur
Mugalsarai
Khurja
MerrutSaharanpur
Ambala
SonNagarAllahaba
Already Awarded
To be awarded shortly
Expected to be awarded in FY14
Expected to be awarded in FY15
Source: DFCCIL, Deutsche Bank
Secondly, preparatory work for feeder routes is completed; ordering is the next step
Indian Railways has drawn up an additional programme of connecting the trunk routes to various beneficiaries through feeder routes from the trunk route on the DFC. Work on two type of feeder routes is being undertaken.
1) Firstly, the construction and upgrade of many existing feeder lines to ensure they can carry 25-tonne axle loads (vs. 20-tonne axle loads being carried today): Close to
As per Schedule, 930km
Rewari-Vadodara civil
contract is slated to be
awarded by June 2013,
followed by electrification
order for ~ 1,000km by
September 2013
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 13
2,587km of feeder routes will be developed on the eastern corridor and an additional 2,082km will be constructed on the western corridor. These upgrades will form part of the track renewal works of Indian Railways. Over the next four years, the capex awards in the first and last mile projects will total cINR300bn. Figure 9 shows the connectivity of these feeder routes.
Figure 9: ~4,500km of feeder routes to be developed
Mumbai
DFC Line (Parallel)
Delhi
Dankuni
Ludhiana
Feeder Line
Okha
Pipavav
Vasai Rd
Thai
Diva
Valsad
Vadodara
Ahmedabad
HaziraRajkot
Kandla PortMundra Port
Gandhidham
MehsanaPalanpur
Virangam
LuniJodhpur
Marwar Jn
Phulera
Jaipur
TundlaAgra
RewariHissar
Katni
Paricha
KanpurUnchahar
Mugalsarai
HarduaganjAligarh
Panipat
HapurMerrutSaharanpur
AmbalaChandigarh
Gomoh
BondamundaChakradharpur
Tata Nagar
Anansol
SonNagar
DurgapurChandil
Allahabad
Mumbai Port
Source: DFFCIL, Ministry of Railways, Deutsche Bank
2) Secondly, Indian Railways and the ministries of coal, power and shipping and private sector players have already sanctioned 17 projects that would ensure first and last mile connectivity on a greenfield basis for a wide spectrum of projects in varied sectors. Figure 10 lists some of the projects identified for last mile connectivity projects under PPP.
The show case project, i.e.
Dhamra rail of L&T and Kutch
railways are completed and
are making good returns
26 April 2013
Infrastructure
Indian Railways
Page 14 Deutsche Bank AG/Hong Kong
Figure 10: Last mile connectivity projects under PPP route
Port connectivity projects Location Length (km) INR bn Remarks
Dhamra Odisha 64 7.6 In-principle approvals from railways.
Astranga Odisha 80 7.0 In-principle approvals from railways.
Dighi Maharashtra 50 3.6 In-principle approvals from railways.
Palanpur-Samakhiali Gujarat 12.7 In-principle approvals from railways.
Total 30.9 Railway Ministry expects INR38bn investment under PPP for 12th plan
Additional port connectivity projects under consideration
Rewas Maharashtra 249.0
Proposals being received by the ministry.
Jaigad Maharashtra 35 Proposals being received by the ministry.
Hazira Port Gujarat 47 - Expected to send proposal for rail line connectivity.
Karaikal Port Puducherry 4.3
Madras Cement and two other cement players Andhra Pradesh 1.3
Coal connectivity projects
Constructing a private line at the Parsa-Kanta coal mines Chhattisgarh 9.0 Proposals under consideration by the govt
Connecting the Gare Palma coal mines with KSK’s power plant.
Chhattisgarh 8.0 Project by KSK Mahanadi
Tori Shivpur–Kathotia Jharkhand 93
40.0
Coal India would entirely fund two of the three projects while the remaining project will be shared by the Indian Railways, Chhattisgarh government and CIL.
Total 57.0 Ministry expects to raise INR40bn under PPP for 12th plan
Iron ore Connectivity projects
Kirandul mines Karnataka 9.0 To be funded by NMDC. Project approved under the MoU by NMDC and Railways
Source: Ministry of Railways, Ministry of Shipping, Ministry of Mines, Ministry of Coal, Deutsche Bank
DMIC is now working on detailed project report; ordering to start in FY15E
On the back of the fast track rail corridor and the feeder routes, the Government of India recently announced that the Delhi-Mumbai Industrial Corridor, which will probably be the largest set of urban infrastructure projects, may leverage the economic benefits arising from the western dedicated freight corridor. Under the DMIC project, the focus is primarily on ensuring high impact developments within a radius of 150km on either side of the alignment of the DFC. The key focus areas of DMIC are:
Develop seven new cities with world class infrastructure. The core infrastructure is to be built by DMIC, while the rest of the work is to be bid out through the PPP route. These new cities should be able to compete with the best international manufacturing and investment destinations.
Figure 12 depicts the areas targeted to be developed in DMIC and the components of DMIC.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 15
Figure 11: Developments within a band of 150km on
either side of alignment of DFC
Figure 12: Components of DMIC span across various
infrastructure sectors and township development
Mumbai
Existing Passenger Rail Link
DFC Alignment
Nodes to be developed in DMIC Phase 1
Dadri
6
4
7
5
2
31
1 Dadri – Noida Ghaziabad IR, UP2 Manesar – Bawal IR, Haryana3 Neemrana – Khushkhera – Bhiwadi IR, Rajasthan4 Pithampur- Dhar - Mhow IR, MP5 Ahmedabad – Dholera IR, Gujarat6 Nashik– Sinnar – Igatpuri IR,Maharashtra7 Dighi Port IA, Maharashtra
DMIC
Real Estate, Integrated Townships
Industrial Parks/SEZs, Agro-processing zones
Po
we
rK
no
led
ge
Pa
rks
Log
isti
csW
ate
r
Ro
ad
sR
ail
Air
po
rtSe
ap
ort
Source: DMIC, Deutsche Bank Source: DMIC, Deutsche Bank
Under the first phase of the DMIC project, the government has laid out the development of seven nodes comprising one investment region in each of the six states and an industrial area in Maharashtra. The development plans also include integrated industrial townships, mega industrial parks, knowledge cities, expressways and highways, intermodal logistics parks, water supply and sanitation projects, power projects (conventional and renewable energy options), airports, mass transport facilities, high speed railways, ports, and smart cities, with an estimated investment of cUSD100bn. A brief snapshot of various projects to be undertaken under DMIC is presented in Appendix C.
Figure 13: Nodes to be developed under phase I of DMIC project
Ahmedabad-Dholera Investment Region, Gujarat Consortium led by M/s Halcrow, UK 903
Shendra-Bidkin Investment Region, Maharashtra (Mega Additionally EBP of Industrial Park, Shendra of 84sqkm)
M/s AECOM, Hong Kong 84
Dighi Port Industrial Area, Maharashtra M/s AECOM, Hong Kong 253Source: DMIDC, Deutsche Bank
Project Parceling risk analysis
is complete; DPR reports for
early bid projects are targeted
to be ready by September to
March 2014. Awards to begin
from FY15
26 April 2013
Infrastructure
Indian Railways
Page 16 Deutsche Bank AG/Hong Kong
DFC as the spark to drive sustained investment in India
Our detailed channel checks based on preliminary work to be done on these three investments covers ~0.09% of land of India. But the states through which the DFC runs contribute to c60% of India’s GDP.
Figure 14: Potential areas to be developed
Area (sq km) Remarks
DFC 107 Mainly for route development
DMIC 2750 Areas for seven early bird projects meant for development of tertiary infrastructure such as industrial parks, knowledge cities, townships etc
Feeder routes 150 Mainly for route development
Total 3007
As a %age of Indian’s total area 0.09
As a %age of Eastern and Western DFC states 0.20 59% of India’s FY11 GDP contribution from DFC states
Source: Deutsche Bank’ DFC states are Delhi, Uttar Pradesh, Haryana, Rajasthan, Gujarat, Maharashtra, Bihar, West Bengal, Punjab, MP
Figure 15 gives a brief snapshot of the basic infrastructure works that could be ordered by the DFC/DMIC
Figure 15: Infrastructure volumes that could be built out
Basic infrastructure to be developed Units Volume of order Time line for order Remarks
Under DFC
Track works Km 3300 FY14-15
Electrification work Km 1400 FY14-15 opportunities for players like Siemens and Alstom
Construction of bridges No. 366 FY14-15 Eastern corridor 104 bridges and western corridor 262 bridges
Construction of flyovers No. 54 FY14-15 Eastern corridor 21 flyovers and Western corridor 33 flyovers
Construction of road over bridges (ROBs) and road under bridges (RUBs)
No 1262 FY14-15 Eastern corridor -368 ROB & 189 RUBs; Western corridor − 505 ROBs & 200 RUBs
Reconstruction/ Lengthening of existing ROBs and RUBs
No 34 FY14-15 Western corridor − reconstruction of 24 existing ROBs and lengthening 10 existing RUBs
Signal and Telecom works Km 3300 FY14-15
Under Feeder Routes(rail)
Upgradation/new routes to fit for 25 tonne axle load
Km 4500 FY15-19e Beneficiaries would be groups such as Adani JSPL, Coal India
Electrification of lines Km 2082 FY15-19e Companies such L&T, KEC(unrated) etc do these work
Signal and Telecom works 4500 FY15-19e L&T, Siemens India
Under DMIC
Manufacturing areas/ SEZs/ Processing industries
Sq km 1200 Creation of high quality industrial infrastructure region over an area of about 2000sq km with over 60% of land use under manufacturing areas/ SEZs/ Processing industries
Road linkages km 7000 Construction/augmentation
Ports
Greenfield Projects No 3 Greenfield Port Projects at Dholera and Maroli in Gujarat, one Greenfield Port Project at Dighi in Maharashtra
Augmentation No 2 Dahej and Hazira Ports in Gujarat;
Airports
Augmentation No 7
New No 2 Construction of air strips
Power Gen and T&D MW 10,000 Ensuring reliable power supply in DMIC region with provision for at least 10,000MW of power
Logistic Sq km 1700 Construction, operation/ maintenance of logistics infra with multi-modal integrated transport infrastructure
Source: Ministry of Railways, DFCCIL, DMIC, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 17
We estimate that the total investment potential in the connectivity programmes would be to the tune of INR2.4tr (cUSD44bn) for creating just this infrastructure. Only 40% of this would be for building the trunk routes.
Figure 16: Massive investment to the tune of INR2.4tr is expected
DFC Alignment, INR958bn, 40%
Fedeer Line, INR467bn, 20%
Government infra built out under DMIC,
INR950bn, 40%
Total Investment INR2.4trn
Source: Ministry of Railways, DFCCIL, Deutsche Bank
The phasing details of the capex programme with regard to connectivity projects are estimated in Figure 17. We believe that the entire capex for the DFC will be completed by FY17, with the bulk of it being done during FY14E and FY15E, when approx. 1,500km of line is expected to be awarded in each of the periods.
% of Phasing 0 1 0 1 1 4 12 15 11 18 16 21 Source: Deutsche Bank estimates
26 April 2013
Infrastructure
Indian Railways
Page 18 Deutsche Bank AG/Hong Kong
Why do we believe in this rollout this time around? Reason 1: Constitutional amendment has made land acquisition seamless
What has been missed by investors (and us so far) is the progress made on the land acquisition front. While it’s a well known fact that land acquisition is the single biggest hurdle for initiating projects in India, the Indian government, first through an ordinance and then followed by a special legislation, passed the Railway Amendment Act of 2008 to acquire land in a seamless manner. As highlighted in Figure 18, this act enabled the government to offer far superior compensation (as compared to those offered under the Land Acquisition Act of 1894).
Figure 18: Better compensation than Land Acquisition Act of 1894
Land Acquisition Act of 1894 Railway Amendment Act 2008
Calculation of compensation Compensation based on market rates, intended use of the land, standing crops, and the higher average of either neighboring property, land purchased for the project, or minimum value from sale deeds
Compensation based on market rates, intended use of the land, standing crops, and the higher average of either neighboring property, or minimum value from sale deeds
Compensation in the case of compulsory acquisition
In addition to the market value of the land, the Court is authorised to award a sum of 30% on such market value
In addition to the market value of the land, the Court is authorised to award a sum of 60% on such market value
Sharing of consideration on transfer of land acquired under Act
Not defined 80% of the difference between the acquisition cost and the consideration received from the sale will be shared with the land owners
Percentage of Sale Deeds used to compute market value
Not defined Recently concluded sale prices for similar land, ascertained from not less than 50%" of the transactions, where higher price has been paid
Unused land Not defined No specific limitations stated; land unused for 5 years shall return to the central government
Verification of land Collector is responsible for survey and standardisation of land and property values
Competent authority appointed by the Railways is responsible for survey and standardisation of land and property values
Source: Ministry of Railways, Department of Land Resources, Deutsche Bank
The important provisions of the Railway Amendment Act of 2008 are:
Acquisition power of the central government: The central government may declare its intention to acquire any land if it is satisfied that the land is required for implementing a railway project.
Power to enter for survey: The competent authority may authorise any person to: a) make any inspection, survey, measurement, valuation or enquiry; b) take levels; c) dig or bore into sub-soil; and d) set out boundaries, etc.
Evaluation of damages during survey: Compensation will be given for land which is damaged during survey, particularly for land which is outside the purview of the acquisition proceedings within six months from the completion of the said works.
Hearing of objections: In the case of an objection to the land being acquired, the person may within a period of 30 days from the date of publication of the notification raise objections to the competent authority. The decision of the competent authority will be final.
Declaration of acquisition: Following the above stages, the central government will declare that the land should be acquired and the land will vest absolutely in government, free from all encumbrances. It is important to note that the
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 19
declaration by the central government will not be challenged in any court or by any other authority.
Compensation: The compensation amount will be determined by the competent authority. It will be based on the market value of the land. The compensation will also include, amongst others, a) expenses required in case the land owner is compelled to change his residence or place of business as a result of the acquisition, and b) damages, if any. What is noteworthy is that the competent authority or the arbitrator is authorised to award, in addition to the market value, a sum of 60% of the market value, in compulsory nature of the acquisition.
Land Acquisition Act of 1894: The Land Acquisition Act of 1894 will not be applicable under the Railways Amendment Act of 2008.
Sharing with landowners the difference in the price of a land when transferred for a higher consideration: In cases where the land acquired under the Act is transferred to any person, 80% of the difference between the acquisition cost and the consideration received from the sale will be shared with the land owners from whom the land was acquired.
Competent authority to have certain powers of civil court: The competent authority will have the power of the civil courts in respect of a) enforcing the attendance of any person, b) reception of evidence on affidavits, c) requisitioning any public record from any court, and d) issuing commission for examination of witnesses.
Reason 2: 73% of land has been acquired; remainder to be done by end of year
As per Economic Survey, 7768 hectares (73%) of the 10,703 hectares of total land required for the corridors has been acquired, and the entire land acquisition process is expected to be completed by the end of 2013. Recent press statements have suggested 86% of the total land has been acquired, and for contracts that will be awarded this year, 98% of the land has been acquired A brief snapshot of the same till March 2012 is given in Figure 19.
Figure 19: Land acquisition progress is 73% completed
Total Scope Section/area notified under 20A Section/area notified under 20E Section/area notified under 20F
Source: Deutsche Bank, Note: The data is as of March 2012
According to press
statements by the ministry,
86% of total land has been
acquired, and for contracts
awarded this year, 98% of the
land has been acquired
26 April 2013
Infrastructure
Indian Railways
Page 20 Deutsche Bank AG/Hong Kong
Reason 3: FY14 marks the critical year for funds tie-up
The DFC project (eastern and western) is expected to involve a project cost of over INR950bn and to be funded by a combination of: (a) debt from bilateral/multilateral agencies, (b) equity from Ministry of Railways, and (c) public-private partnership.
The funding for the DFC is structured so that the entire equity will be funded by Indian Railways from the budgetary support of the government to Indian Railways. The debt funds, to the tune of 73%, will be financed by JICA (Japanese International Corporation Agency) for the western corridor and World Bank for a large portion of the eastern corridor.
In addition, the government from time to time has ensured that adequate equity funding is made available for the corridor project. As late as in the budget speech of 2013-14, the Finance Minister indicated, “the Delhi Mumbai Industrial Corridor (DMIC) project has made rapid progress….In order to dispel any doubt about funding, I wish to make it clear that we shall provide, if required, additional funds during 2013-14 within the share of the Government of India in the overall outlay for the project”. To ensure that the committed liabilities for debt servicing of JICA and World Bank loans are taken for the DFC projects, the government has also decided to create a corpus by setting up a debt service fund. In FY14, the government announced an allocation of INR41.63bn to the fund for repaying the loan taken from these agencies.
Figure 20: JICA to fund western corridor; Indian Railways, World Bank, PPP to fund eastern corridor
Corridor Length (km) Targeted completion Remarks
western corridor 1483 40-year Special Terms of Economic Partnership loan of JPY 677bn signed with Japan Government
Phase I Rewari – Vadodara 920 2016 First tranche of JPY 90bn signed with JICA
Phase II Vadodara – JNPT 430 2017 First tranche of JPY 266bn under negotiation with JICA
Phase III Rewari – Dadri 140 2017
Eastern Corridor 1839
Phase I-APL1 Khurja − Kanpur 343 2016 First tranche of USD975m already signed with IBRD
Phase II-APL2 Kanpur − Mughalsarai 390 2016 To be funded by World Bank
Phase III-APL3 Khurja – Ludhiana 397 2016 To be funded by World Bank
Phase IV Dankuni – Sonnagar 550 2016 To be finance through PPP Mode
Phase IA Sonnagar − Mugal Sarai 125 2016 To be funded by Ministry of Railways
Grand total 3322 INR450bn on 2009 costs. Likely completion cost is INR950bn Source: DFCCIL, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 21
Reason 4: Contract awarding is well defined by international standards, and an itemized contract method will not be followed henceforth
From the contract award point of view, the engineering standards and designs have, encouragingly, already been finalised. The contracts award process is as per the FIDIC standards – the only applicable international standard for awarding contracts. Of the four strategies (red book, green book, silver book and yellow book) DFCC has decided to go ahead with the yellow book – which is basically for lump-sum contracts on milestones with the plant and design-build undertaken by the contractors (unlike the scheduled itemized contracts followed in most government projects).
The engineering consultants have also been appointed (Nippon Koei Co, Tokyo in the case of the western corridor) as well as the people who will be verifying the work done by the contractors. Other facets, such as the key packages in each of the corridors, including civil, building and track works (three packages), construction of special steel bridges (one package), and signal and telecom works (one package), have also been identified.
In the case of the western corridor, the STEP component is 30% of the overall work, which will be awarded to the Japanese entities (given funding from JICA). This involves work towards project components (plant and equipment for operation and maintenance, procurement cum maintenance of electric locomotives and construction of a new maintenance depot and facilities for electric locomotives). As far as the other packages are concerned, they are likely to be given to consortiums where 51% or more is owned by a Japanese entity.
Reason 5: FY14 could well be an inflection point for civil contract awards
It is heartening that progress for the DFC is not just related to land acquisition. A lot of civil contracts have been called for and ~54 bridges have already been constructed on the corridor, especially on the western side. So far, DFFCIL has awarded contracts worth INR50.4bn, and a greater chunk of the contracts were awarded between FY10 and FY13.
Total 0.4 15.4 0.3 0.4 1.0 32.9Source: DFCCIL, Deutsche Bank
Going forward, looking at preparatory work for awards of civil contracts, FY14 should be the period when the DFCC orders large awards. In fact, toward late FY13, the Khurja Kanpur order on the eastern corridor was given out to Tata Aldesa JV. Following this, we expect INR145bn of civil contracts to be awarded each in FY14E and FY15E.
DFCC has decided to go
ahead with the yellow book –
which is basically for lump-
sum contracts on milestones
with the plant and design-
build undertaken by the
contractors (unlike the
scheduled itemized contracts
followed in most government
projects)
Khurja-Kanpur order has been
awarded, starting the
programme of large ticket
construction orders
26 April 2013
Infrastructure
Indian Railways
Page 22 Deutsche Bank AG/Hong Kong
Figure 22: Preparatory work for major contract works to be awarded has been completed
INR bn Length Corridor FY13 FY14 FY15 Remarks
Civil construction, building and track works
Rewari-Ajmer 283 Western 27 RFQ over
Ajmer-Ikbalgarh 342 Western 33 RFQ over
Ikbalgarh-Vadodara 305 Western 30 RFQ over
Vadodara JNPT & Rewari − Dadri 569 Western 55
Bahupur − Mughalsarai 393 Eastern 38
Ludhiana − Khurja 447 Eastern 43
Khurja – Bhaupur 343 Eastern 33 Tata Aldesa JV won the bid
Mughalsarai − Sonnagar 118 Eastern 11 RFQ done for 66km stretch (New Karwandiya to Durgawati). L&T, Kalindee − Isolux JV, Siemens India Ltd and KEC-KIEL JV have qualified for 2*25 kV electrification and signaling works Whereas 22 firms including L&T and Tata Projects have qualified for design, procurement and construction of track
Sonnagar − Dhankuni 538 Eastern 52
Systems contract (electrical, signaling and telecom) for Phase I (Khurja-Kanpur section)
Eastern Bid submission expected soon
Design & construction of special Steel Bridges across rivers Mahi & Sabarmati involving Bridge Structure
Western Invitation for Prequalification on Dec 30, 2011
Signaling and Telecommunication Works for Contract Package ST P-5, Rewari-Vadodara
Western Notice inviting tender has been issued
Estimated total value of civil works to be awarded
33 145 145
Source: DFCCIL, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 23
Reason 6: Project progress monitoring has been laid out
The DFCCIL has also clearly spelt out the timelines for the progress to be monitored across the various packages and the progress that is actually being made.
Source: Dedicated Freight Corridor Corporation of India, Ministry of Railways, Deutsche Bank
Reason 7: Railways have now offered various options and uncapped returns to developers to kick-start the first and last mile connectivity projects
The success and failure of railways across the world is largely due to their ability (or inability) to match the road network in terms of services and connectivity. There is no doubt that railway shipment is far cheaper than road-ways, but the issue of connectivity makes industry apprehensive of moving goods on railways; and by and large railways get relegated to moving only bulk traffic, which is not remunerative enough. In this context, we were shocked to see the extent of Indian Railways’ preparedness in tackling the most critical aspect of the plan, i.e. the usage of the new trunk route at the beginning of the project by getting a buy-in from their customers to use their network before the trunk route is fully ordered.
This message from Indian Railways to all investors, stakeholders and customers is loud and clear:“I would do the trunk route ; if you want last mile connectivity, I ill clear the regulatory hurdles; and most important you can make as much returns as possible on your investments – there is no cap.”
26 April 2013
Infrastructure
Indian Railways
Page 24 Deutsche Bank AG/Hong Kong
The government in its budget for 2013-14 stated that the connectivity improvement projects would entail an investment of INR90bn (INR38bn for port connectivity projects, INR40bn for coal mine connectivity and INR8bn for iron ore mines connectivity).
Figure 24: For developers, substantial improvement in returns and risk distribution is far more acceptable
New participative models Earlier Remarks
R3I R2CI
Coming into effect 10-Dec-12 20-Jul-10 21-Feb-11
Applicability All Not applicable to Coal and Iron ore Mines
Applicable for Coal and Iron ore Mines
One policy to for all eliminates the confusion for applicability of law-
Number of Models Five :-Non-Government Railway Model, Joint Venture Model, Capacity Augmentation with Customer Funding, Build Own Transfer, Capacity Augmentation-Annuity Model
Four :-Cost sharing-freight rebate model, Full contribution- Apportioned earning Model, the SPV model and the Private Line Model
Two :-Capital Cost and SPV model
Lot of options available-
Eligibility NA New line proposals which are 20km or more in length
New line proposals which are 20km or more in length
-
Private line model 95% of freight revenue shall accrue to the developer. 95% of the net apportioned revenue will be shared with the private party, after deducting the operation and maintenance costs.
95% was shared over the gross revenue.
NA Attractive for developers-
Private line model No takeover of private infrastructure by the railways
At the end of the 30 years period, Railways will have the right to take over the line at zero cost.
NA Leading to reduction in risk-
Joint Venture model Removed the cap of 14% rate of return on investment
Proposes Financial Internal Rate of Return of 14% under Cost sharing-freight rebate and SPV model
NA Opportunity to earn higher returns-
Joint Venture model Traffic guarantee will be signed wherever such guarantees are considered necessary to mitigate the demand risk
Compulsory Minimum Traffic guarantees by the private party
NA Attractive to private players-
Joint Venture model Offers a minimum concession period of 25 years, extendable up to 35 years
The concession shall lapse as soon as the NPV on the project equity reaches zero at a discounted rate of 14%.
NA Extendable concession period would make the lending institution comfortable in lending money
Customer-funded model
Railways to return up to 7% of the amount invested through freight rebate every year till full amount is recovered with interest rate equal to dividend rate
Railways offered a return of 10-12% only on incremental outward traffic.
NA Likely to reduce the risk-
Source: Deutsche Bank
Options to participate for private players have also increased Indian Railways has approved five different models for private participation in the sector to encourage building last mile or first mile connectivity. These participative models for rail connectivity and capacity augmentation projects have also been approved by the Cabinet Committee on Infrastructure. Out of five models, three models harness the interests of strategic investors to implement projects and two models are slated to be awarded through competitive bidding.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 25
Figure 25: Snapshot of models being proposed by the government
Strategic Investors Strategic/Financial Investors
Non Governmental Railway Private Line
Joint Venture Model Capacity Augmentation with Customer Funding
Build Own Transfer Capacity Augmentation-Annuity Model
Applicability Ports, large mines, logistic parks or cluster of industries handling consignments for multiple users can build and maintain rail line on private land.
For Bankable projects with identifiable strategic stakeholders (State Govt, ports, mines ,industries)
Pure financing of a railway project through project advance by Customers
Normally for freight oriented lines like DFCs.
Construction of Double Line/Third line/Fourth line where specific users are not identified
Project development and project structuring
Project Developer Railways or its PSU through consulting firms
NA
Railways Railways
Land Acquisition Project Developer Railways or by JV Railways Railways Railways
Bidding NA NA NA Competitive bidding process; bid parameters being Viability Gap Funding from Govt.
Competitive bidding on annuity payment basis; Annuity is the bidding parameter
Operation and revenue collection
Railways Railways Railways Railways Railways. The concessionaire would be paid through annuity
Joint Venture NA Railways with a minimum of 26% equity
NA NA NA
Construction Private Railway either through its own private agency or through Railways as special deposit work.
JV Railways Concessionaire Concessionaire
Funding Pure private funding including land
JV Major customers who want such projects
Concessionaire Concessionaire
Maintenance Developer or railways Railways or Joint Venture Railways Concessionaire
User fee Infrastructure provider to get a user fee equivalent to 95% of apportioned traffic revenue for the line net of cost of operation
User fee to JV by apportionment of freight revenue on distance basis
Railways to return up to 7% of the amount invested through freight rebate every year till full amount is recovered with interest rate equal to dividend rate
Concessionaire to be given user fee equivalent to 50% of the apportioned freight
Railways to provide annuity as user charges
Concession period Since project line is on private land and the assets are fully private infrastructure, it will be transferred to IR in the case of violations of specified terms of agreement
Normal period is 30. Concession period beyond 25 years linked with materialisation of traffic.
NA Normal Concession period is 25 years with a traffic review after 20 years to increase or decrease the concession period
Concession period will be fixed in the range of 15-20 years
Source: Ministry of Railways, Deutsche Bank
Reason 8: Indian Railways seems to have incorporated past experience into current PPP project offerings
Clearly, at this juncture, returns in all other infrastructure segments have come down and the only unexplored sector for the private sector remains railways. To address this (and also thereby lower funding requirements), Indian Railways is going all out to woo investors with a risk-return profile that seems comparable to the best assets that other Indian infrastructure concessions have so far awarded.
26 April 2013
Infrastructure
Indian Railways
Page 26 Deutsche Bank AG/Hong Kong
Figure 26: Showcase project concessions in Indian infrastructure
Units Best in Roads Best in Power Best In Port What is Railways offering
Project Name Mumbai- Pune Express way
JSPL-1000MW Chennai Container terminal/JNPT Berth 2
Feeder routes of 4500km
Project Cost INR bn 38 43.38 ~ INR200m/km
Concession Period 15 Typically 30 years
When was project commissioned
Sep 06 Dec'2007-Sep'2008 Probably in FY14/15
Were there large participants
only Gammon India (JV with Ashoka Buildcon, Viva Highways and Viva Infrastructure Pvt Ltd)
none very few Right now 6 bidders have shown interest
Difference between L1 and L2
0.9% n/a n/a n/a
Project IRR 80% plus 100% 60% plus Cap of 14% on returns are removed
Equity IRR 80% plus 155% plus 80% plus
Key reason for good returns
First of large BOT projects
First of Integrated, IPP in India
First of Major Ports in India
User charge fee regulated
No no No
Increase in user fee Annual in line with WPI Market driven Cost push is allowed as tariff increase
yes
Did this spur investments
yes yes yes yes
Quantum of sector investments over next three years
14000 km of road awards in 6 years
52GW of private IPP ordered
INR300bn would rise to INR900
Time before sanity hit the sector
4-5 years
Source: Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 27
Where could the slip between cup and lip be? Risk 1: Relationship between the DFC and Indian Railways is somewhat ambiguous
The Dedicated Freight Corridor is being executed through a SPV structure within Indian Railways. What is the relationship between Indian Railways and the SPV, the Dedicated Freight Corridor Corporation of India (DFCCIL)? Indian Railways is the owner and largest customer of this service from the SPV. The owner looks for enhanced income and the buyer is on the lookout for reduced costs.
The DFCCIL is allowed to construct, maintain and operate the corridor but not to fix prices. Till now, the DFCCIL did not have autonomy on spare track capacity, available after serving Indian Railways’ freight traffic. As far as Indian Railways is concerned, it is unwilling to provide tariff setting power to the DFCCIL. Worry for investors could emerge if Indian Railways starts treating the DFC as a new competitor to Indian Railways by setting lower tariffs than the Indian Railways network. Under the current system of the cost-plus ideology, Indian Railways may merely provide track access charges to the DFCCIL that will cover operational and maintenance costs, and such a system will not encourage or incentivise the DFCCIL to increase profitability or reduce cost.
Deutsche Bank view: We believe the best thing for Indian infra development is that infrastructure tariffs are set in such a manner that benefits user industry and gives reasonable returns to investors. In the case of the DFC, the operating cost is likely to be one-third that of Indian Railways. The ministry as well as the DFC is keen that a large part of this benefit should be passed on to the user industry – implying that tariffs in the DFC are likely to be quite low and returns should be nominal to cover the cost of capital. Further, the way the infrastructure is being laid out is the greater the use, the lower the charges, and vice versa. This is the first time that such an initiative is being planned for infrastructure charges and should dissipate most investors’ doubts, especially as the western and eastern corridors are largely constructed on an EPC basis. However, for PPP modes to be successful in other corridors, setting up a rail tariff regulator with an authority to fix tariffs would be a welcome change.
Risk 2: Organisational structure of the DFC does not look commercial
The dedicated freight corridor is being implemented through a SPV, “Dedicated Freight Corridor Corporation of India (DFCCIL),” set up under the administrative control of the Ministry of Railways. The corporate structure of the DFCCIL in the present form (Figure 27 and Figure 28) with a focus on functional classification is similar to any government organisation, which may affect efficient coordination across departments. The decision-making process may also be affected given that Indian Railways is the sole owner and customer of the DFCCIL.
26 April 2013
Infrastructure
Indian Railways
Page 28 Deutsche Bank AG/Hong Kong
Figure 27: Corporate headquarters of DFCCIL Figure 28: Corridor headquarters
Managing Director
Director (PP)
GGM Eng-1
GGM Eng-II
GM/CO (EC)
GM/LA & SEMU (EC)
GGM/P(EC)
GM/S&T/EC
GGM/Tech Services
GM/Servey & HQ
GM/Electrical (EC)
Director (Infra)
GGM/Electrical
GGM/Proc (WC)
GGM/S&T
GM/CO (WC)
GM/Electrical (PS)
GM/ S&T (WC)
GM/Signalling
GM/SEMU/WC
Director (Finance)
GGM/Fin.
GGM/Fin&IT
GGM/RM
Director (OP & BD)
GGM/Operation & Safety
GGM/BD
GGM/HR, GGM/Admin.
GM/Traffic
Coordination
CVO
Executive DirectorCorridor
GM Infra GM Systems GM Transportation GM Finance
Trac
ks
Brid
ges
and
Stru
ctur
es
Trac
k M
achi
nes
Depot Staff
Ope
ratio
ns
Loco
& R
ollin
g St
ock
PR &
BD
Safe
ty &
Sec
urity
Fina
nce
Budg
et
Trac
k A
cces
s
Depot Staff Station, Safety & Control Staff
HR & Training Staff Finance Staff IT Staff
OH
E
Pow
er S
uppl
y
Sign
al
Tele
com
Source: DFCCIL, Deutsche Bank Source: DFCCIL, Deutsche Bank
Deutsche Bank view: We believe that the DFCC project is still in its initial stages and there is a case for making the organisational structure more robust and aligned to (a) consumer interest, (b) functional aspects of the organisation for growth, and (c) review of progress for existing projects.
Risk 3: Will government monitoring increase?
Few investors feel that increased monitoring by the government of India could cause a push-back of projects similar to what was seen in roads. This risk seems all the more valid given that multilateral loans have come with a sovereign guarantee.
Deutsche Bank view: With funding being driven by multilateral aid, there is a three-way understanding between central/state as well as multilateral agencies on the progress of the work. Both JICR as well as world bank send teams for monitoring once a month and the entire process is coordinated in such a manner - that we have not seen work getting delayed unless there are issues of corruption, etc. Looking at the fact that the entire bidding is being done on international FIDIC based contracting - we find little risk that The Dedicated Freight Corridor has an investment potential of INR2.4tr and at this juncture a higher level of monitoring may not be a bad idea.
Risk 4: Will railways reduce returns on feeder routes progressively?
One of the biggest worries of developers is that returns for the projects will keep coming down as we move forward. Whether it is ports, power or roads, the returns from concessions continue to decrease. So the ability of railways to fund PPP projects of first mile and last mile connectivity could face delays due to the risk of lower returns on those projects.
Deutsche Bank view: Looking into various regulatory processes, Indian regulatory actions do not have a grandfather clause. So yes, there does remain a risk that
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 29
sometime in the future returns could get reduced as the risk becomes lower − but that would not mean that existing contracts would see lower returns. The recent examples of cases of power and roads suggest that regulators have in fact helped developers to work out returns which are reasonable.
Risk 5: How critical is the risk from government changes?
With elections in eight states and the national elections scheduled over the next 12-15 months, a worry for most investors is like most other projects, would the DFC project be pushed back.
Deutsche Bank view: Cabinet approval is required for any project concession awards or any government EPC award. So if the government is reduced to minority status, this would be a genuine risk. Having said that, so far the limited commentary that we have heard given by business leaders on the land acquisition bill suggests that more debate is needed for the bill to make it more market-friendly. But considering that the monitoring of all early parts of the DFC project is done by the multilateral agencies, the risk of a massive slowdown looks quite remote.
Risk 6: Cash flows available with prospective bidders
Most of the infrastructure companies are in high leverage and the ability to tap equity markets looks less likely. The balance sheets of these companies also appear stretched. Where would the equity funding come from?
Figure 29: FCF does not look comfortable Figure 30: D/E is slightly stretched
(8000)(6000)(4000)(2000)
02000400060008000
Hin
dust
anC
onst
ruct
ion
Co.…
Gam
mon
Indi
a Lt
d.
N C
C L
td.
Punj
Llo
yd L
td.
Sadb
hav
Engi
neer
ing
Ltd.
Sim
plex
Infra
stru
ctur
es L
td.
Uni
ty In
frapr
ojec
tsLt
d.KE
C In
tern
atio
nal
SPM
L In
fra
Pate
l Eng
inee
ring
IVR
CL
IL&F
S In
fra
JMC
Lars
en a
nd T
oubr
o
Siem
ens
FCF (INR mn)(INR Mn)
HCC
Gam
mon
NCCPunj
Sadbhav
SimplexUnity InfrKEC
SPMLPatel EngIVRCL
IL&FS InfraJMC
L&TSiemens
0.0
2.0
4.0
6.0
8.0
10.0
12.0
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
Source: Company data, Bloomberg Finance LP, Deutsche Bank Source: Company data, Bloomberg Finance LP, Deutsche Bank
Deutsche Bank view: On the face of it, the concerns are reasonable. Unlike roadways where NHAI has stated that the traffic risk estimation is that of the developer, we like that this rail programme has identified end-users who will see tangible benefits as and when these lines develop. Also, for a few companies like L&T and large end use players such as NTPC, Coal India and Adani Ports, funding will not be an issue. In addition, we have newer participants coming in the infrastructure space, such as Piramal Group as well unlisted players such as Shapoorji Paloonji.
Risk 7: Risk of building regional monopolies-
Can Indian Railways and the dedicated freight corridor SPV ensure a level playing field and non-discriminatory access to infrastructure to all the operators on DFC?
Deutsche Bank view: Indian Railways continues to be the operator and hence the situation may not go the way Australian rail privatisation did.
26 April 2013
Infrastructure
Indian Railways
Page 30 Deutsche Bank AG/Hong Kong
Who are the beneficiaries?
Rail capex has multiple beneficiaries
As India embarks on the rail capex plan, we outline a gamut of industries which are likely to receive the benefits of this large capex.
Project developers, construction players (including track laying companies) and equipment suppliers are likely to be the key beneficiaries in the first leg of the capex.
Raw material suppliers such as cement, aggregates, and steel are likely to benefit with a small lag.
As the project moves ahead towards completion, the rolling stock suppliers could start to see the benefits.
At the end of the project are the key user industries- both bulk cargo customers like power, steel, cement and mining companies which supply the raw material for these user industries. Container train operators and shipping lines are likely to benefit out of faster turnaround times and cheaper movement, which could have a cascading impact on the large manufacturing outfits in the country.
Figure 31: The railway capex, particularly the DFC, could have manifold impacts on the
economy
Enablers
Dedicated Freight Corridor
Design Engineering
Engineering consultants
Preparatory civil works
Civil contracts
Cement, Aggregates, Steel
Track laying companies
Electrical Mechanical
O&M equipment
Rolling stock suppliers
Freight Terminals
Logistics providers
Industrial Parks
Material Handling equipment
Port operators
Container lines & handling
Mining companies
Industrial and power players
Ordering for trunk routes
FY14 FY15 FY16 FY17 FY18 FY19
Culmination of DFCs and Start of First and Last Mile
Connectivity
Start of DMIC and LogisticParks
Developer start getting benefit, ordering for new
cities getting build out
Signalling equipment
DFC Feeder routes DMIC
Source: Deutsche Bank
While these key customers and user industries are likely to benefit across the lifecycle of the project construction and conclusion, the second derivative benefit (i.e. once the projects benefits start getting realised, a more broader
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 31
spectrum of industries can benefit) is likely to include all industries in the value chain of any of the above listed beneficiaries (ranging from housing, financing companies, equipment suppliers for the new capex in these industries, utilities, etc.).
Railway PPP programme has a set of natural beneficiaries
The development of DFCs also includes the upgrading of feeder routes fit for the 25-tonne axle loads − c1,379km on the eastern corridor and c2,841km on the western corridor. Some of the key routes with identified end-user industries across both the western and eastern corridors (refer to Figure 32) form part of the track renewal works of Indian Railways.
Figure 32: Some of the specific beneficiaries across the feeder routes
Foodgrain, Salt Cos, Lignite Cos, Fertiliser Cos, Bauxite, auto, textile, mineral power gen co. For eg Maruti
Suzuki, IFFCO, Tata Power
IOCL, Tata Chemicals, Cotton Cos
Cement, Textiles, Chemical, Plastics, Electronics, Stainless Steel Cos. For eg
Grasim
Cotton,Petrochemical, Engineering, Oiland Gas Cos. For eg L&T, Reliance,
ONGC, IPCL, BPCL, RCF etc
Textile, steel, power, pharma, cycle, auto cos. For eg Jindal India, HPGCL
Coal/ Iron mining Cos. For Eg Tata Steel, Coal India
Coal/ Iron mining Cos. For Eg Tata Steel, SAIL, Bokaro Steel, Coal India
Power, Cement, Fertiliser Cos. For Eg UPRVUNL, NTPC, Ambuja, Ultratech
Mineral and Agro Cos. For Eg ACC, SAIL
Bicycle, auto cos.
Sugar, Textile, Agro Cos
Power Cos. For Eg UPRVUNL
Source: Deutsche Bank
DMIC contracts could open up doors – Japanese companies seem to be frontrunners
Based on our field trips as well as government data on work being done for new industrial corridors, we find that the Japanese companies have made significant inroads into the various projects being undertaken across the states – in effect making them a natural contender for new orders as and when the work picks up.
26 April 2013
Infrastructure
Indian Railways
Page 32 Deutsche Bank AG/Hong Kong
Figure 33: Prospective projects for Japan's USD4.5bn DMIC facility (as of 19 November 2012) State Name of the project Sector Interested Company
Gujarat Smart community platform (e.g. industrial wastewater treatment and reclamation, lithium-ion battery infrastructure) in industrial parks at Sanand
Urban Development Mitsubishi Heavy Industries’ consortium
Gujarat Grand design development focusing on water supply to an industrial park through seawater desalination, and on photovoltaic power generation at Dahej
Water Hitachi's consortium
Gujarat Mobile Phone Recycle Project Others Japan Environment Planning (JEPLAN)
Gujarat Concentrated Solar Power Project Power Mitsui Engineering Shipbuilding Co., Ltd.
Gujarat Transmission Project with Smartgrid Power Hitachi
Gujarat Dholera Providing industrial grade Recycled Waste Water to Dholera Special Investment Region
Haryana Establishment of a compound microgrid (electricity and heat) including industrial water treatment in an existing industrial park at Manesar.
Power Toshiba's consortium
Haryana Regional MRTS between Delhi-Manesar-Bawal-Neemrana with feeder service to enhance connectivity between Delhi and the upcoming manufacturing hubs
Transportation
Maharashtra Urban development centering on a smart water treatment system, including water supply, water reuse, and sewage at Shendra
Urban Development JGC's consortium
Maharashtra High-Efficient Gas-firing Combined Cycle Power Producer Power Mitsubishi Corp.
Maharashtra Gas-Fired IPP Project Power Marubeni Corp.
Maharashtra Light Rail Transit system at Pune Transportation Toshiba
Rajasthan Efficient and stable supply of high-quality electricity in a Japanese-affiliated industrial park at Neemrana.
Power Mitsui-KEPCO consortium
Rajasthan Treated Water Conveyance System from Okhla to Neemrana Water -
Madhya Pradesh Water Supply from Narmada at Pithampur Water -
Uttar Pradesh Transport connectivity to Dadri- NOIDA- Ghaziabad Investment Region
Transportation -
Non-State specific Logistic Data Bank Project Logistics NEC
Non-State specific Automobile Freight Train Operator Transportation in DMICDC corridor
Transportation Sojitz
Source: DMIC, Deutsche Bank
Among the companies under our coverage, we list the various key companies that can benefit
L&T as an EPC company looks favourably placed On the western corridor, the DFCC has already begun the tendering process for the phase-I Vadodara in Gujarat to Rewari in the Haryana package, which spans a length of 930km across three contract packages. If one were to assume the bid levels similar to the Tata-Aldesa bid in the eastern corridor (~INR97m per km), the potential size of the contract opportunity is likely to be around INR90bn.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 33
Figure 34: Packages and expected size of phase 1 of the western corridor
Preparedness of some of the other listed Indian companies Indian Railways’ spend would encompass a lot of segments in the economy, and our sample list is in no way a complete and exhaustive list. A look at the ratings would let you know that we do not cover a lot of stocks, and within our coverage, we still have Sell and Hold ratings for many companies, as we find the valuations a bit rich.
Figure 35: Listed Indian companies that could benefit from the various facets of this large railway capex
Company Segment M.Cap (INR m) Recommendation Company description
ABB India Automation & control equipment 107,766 Yes Have few verticals catering to Rail capex demand
ACC Cement 226,456 Yes Pan India Cement player - subsidiary of Holcim
238,659 No A conglomerate with interests in trading, logistics, ports and power
Adani Port & SEZ Port operator 295,100 No Largest private sector port player
Adani Power Power genco 115,834 Yes Leading private utility player
Ambuja Cements Cement 252,750 Yes North and Western Indian cement player - subsidiary of Holcim
ARSS Infra Track-laying 488 No A leading railway track - laying contractor
Concor Container lines & handling 140,381 No Leading container transportation player
Elecon Engineering Material handling equipment 3,176 No Material handling player
Essar Port Port operator 36,810 Yes Leading private sector port player
Everest Industries Industrial parks 3,097 No Leading pre-fab buildings and asbestos cement roofing manufacturer
Gateway Distriparks Container lines & handling 13,238 No Leading private container transportation player
Gujarat Pipavav Port operator 23,229 No Leading container port operator
India Cements Cement 25,081 Yes Southern India cement player
Jindal Steel & Power Long steel 307,281 Yes A conglomerate with interests in steel, power, mining
Kalindi Rail Track-laying 627 No A leading railway track - laying contractor
Mcnally Bharat Material handling equipment 2,205 No Material handling player
NTPC Power genco 1,229,398 Yes India's largest power utility
SAIL Long steel 258,357 Yes India's largest steel player
Shree Cement Cement 151,890 Yes Northern India cement player
Siemens India Signaling equipment 178,442 Yes One of the largest equipment contractors for Railways
Simplex Infrastructure Preparatory civil works 5,887 No Largely a civil contractor
Tata Power Power genco 224,752 Yes Integrated power company
TexRail Rolling stock 9,010 No leading Indian rolling stock manufacturer
Titagarh Wagons Rolling stock 3,442 No leading Indian rolling stock manufacturer
TRF Material handling equipment 1,893 No Material handling player
Ultratech Cement Cement 510,906 Yes Pan India Cement player Source: Company Data, Deutsche Bank, Price related information as of April 23, 2013
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 35
What are the expectations?
Figure 36 gives a snapshot of the valuations of the rated and unrated companies. Valuations of unrated companies are based on Bloomberg Finance LP consensus numbers.
TRF Unrated 172 1,893 122.9 9.8 9.6 6.7 1.3 1.2 0.6 13.3 Source: Bloomberg Finance LP, Deutsche Bank. The estimates for non covered companies are based on consensus estimates as per Bloomberg Finance LP *Prices as on April 23 2013
26 April 2013
Infrastructure
Indian Railways
Page 36 Deutsche Bank AG/Hong Kong
Reuters Bloomberg LART.BO LT IN
Better order inflow outlook + NWC reversal = re-rating We estimate that L&T’s order inflow growth may well break the INR 700-800bn barrier of FY10-13 and touch INR 1trn in FY14E, driven by a combination of rail capex and m/s gains in the power sector. The kick-start of the investment cycle could help reverse the 1200 bps slide in NWC/sales (FY13E: NWC/sales at 21%). Further aggressive cost cuts and weak commodity prices could help cushion the margin fall and raises consensus estimates. We raise our SOTP-based TP to the top of the Street’s INR 2,045/sh and retain Buy on valuation.
Won’t be surprised if company guides for 15-25% FY14E order intake growth Over the last three years, Larsen has managed to bag new orders in the range of INR 700-800bn p.a. Thanks to the improving outlook on railways as well as the power sector order pipeline, L&T could well break this band and get new orders of INR 950bn to INR 1,000bn in FY14E vs. Street expectations of flat-to-negative 20% order inflow expectations − a big driver for re-rating.
Our revised estimates factors in some of the perils of downturn Based on our revised forecast, we have raised our order-inflow expectations for FY14E/FY15E by 12%, implying a 15-25% increase in order inflows for FY14E. Accordingly, we now raised our EPS for core engineering business (standalone basis) in FY15E by 11%. On a consolidated basis, the impact is muted, as we have built in delays/pushback in commissioning of projects in L&T-IDPL-but still our estimates are now a good 6% ahead of consensus.
Raising 12M SOTP-based target price to INR 2,045/sh (top of the Street) We have arrived at our INR 2,045 target price using SOTP, which values the both long cycle as well as short cycle at an exit multiple of 20x FY14E (earlier 19x for long cycle and 23x for short cycle) as we find both businesses earnings factoring in business outlook which are similar and earnings based on low utilization levels. L&T IT is valued at 10x (earlier 8x) in line with its peers and L&T-IDPL at exit P/B of 1x.Key risks: 1) Pushback in new orders and rise in NWC/sales beyond 30%; 2) 1% lower margin could hurt FY14E EPS by 10%.
Rating
Buy Asia India Conglomerates
Company
Larsen & Toubro Ltd
Looks set to break shackles of flat orders; raising TP on top of Street
OLD DB EPS FD (INR) 69.52 76.35 79.32 97.28 115.03
% Change 0.0% 0.0% -1.1% -6.8% 1.3%
DB EPS growth (%) 21.1 9.8 2.7 15.6 28.6
PER (x) 25.8 19.2 19.4 16.8 13.0
EV/EBITDA (x) 18.5 16.1 13.5 11.9 9.7
DPS (net) (INR) 14.50 14.56 17.95 17.95 17.95
Yield (net) (%) 0.8 1.0 1.2 1.2 1.2Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items, 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
Larsen & Toubro Ltd Reuters: LART.BO Bloomberg: LT IN
Buy Price (25 Apr 13) INR 1,518.75
Target Price INR 2,045.00
52 Week range INR 1,134.50 - 1,711.40
Market Cap (m) INRm 924,694
USDm 17,062
Company Profile Larsen & Toubro Ltd is India's largest engineering and construction company. L&T's business model has evolved into a distinct E&C and non-E&C business. The long-cycle E&C portion is cyclical and dependent largely on new project capex. The short-cycle non-E&C business largely comprises business segments such as electrical and electronics, industrial products, IT(L&T Infotech), Financial services (L&T Finance) and various infrastructure projects under public private partnership. The company commands an international presence with operations in the Middle East, Malaysia and China.
We would not be surprised if management suggests a band of 15-20% growth in new orders for FY14E
Over the last three years, Larsen has managed to bag new orders in the range of INR 700-800 bn per year. We believe that thanks to the improving outlook on railways as well as the power sector order pipeline, L&T could well break this band and get new orders of INR 950bn to INR 1,000bn in FY14E vs. Street expectations of flat-to-negative 20% order inflow expectations.
Important large ticket orders to watch out for are: (a) Civil orders on the western corridor and (b) wagon tippler orders, as L&T is the only Indian company pre-qualified for use in western DFC. In western DFC, L&T is competing with fewer competitors. For instance, on the Rewari-Vadodara route of the western corridor, only three consortiums are qualified (refer to Figure 37 for details).
Figure 37: Packages and expected size of Phase 1 of the western corridor
Other key orders to watch out for in the next 12-24 months are:
(a) Signalling packages on the western corridor
(b) Electrification packages on the western corridor
(c) Tenders in Kochi Metro award
(d) Ahmedabad Metro Rail
(e) Pune Metro Rail
L&T could well break last
three year’s band of order
inflows of INR 700-800bn and
get new orders of INR 950bn
to INR 1,000bn in FY14E vs.
Street expectations of
flat-to-negative 20% order
inflow expectations
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 39
(f) Delhi Metro Phase-3 signalling as well as electrical
The following table depicts our key assumptions and rationale for estimating order inflows for FY14E being 15-25% higher than FY13E. Note our inflow assumptions factor in 40% compression from building and road infrastructure.
Figure 38: Railways a big driver of demand in FY14 FY11 FY12 FY13 FY14 Remarks
Railways 0.0 4.1 9.3 100.0 Orders expected from DFC, DMIC and metros
Urban Infra 59.0 4.7 12.0 22.0 Kochi, Ahmedabad and Pune are ripe for orders
Power Gen 125.3 37.4 95.9 183 4000MW of order expected each year, with L&Ts market share being 35%
Power T&D 0.0 27.8 63.2 55.0
Power BOP 63.3 6.1 4.1 10.0
Fertiliser 0.0 0.0 0.0 33.0 Assumed market share of 25%. Assumed fertilizer industry to invest INR500bn over FY14-17E following revised policy on Urea
Nuclear 0.0 0.0 7.3 0.0 No orders assumed in FY14e
Process Hydrocarbon 33.0 14.5 15.3 15.0 No upcycle assumed and at same levels over last three years.
Process-Metals/Chemicals 99.2 37.6 4.6 0.0
Other Infrastructure 96.5 175.9 252.2 150.0 Estimates factor a 40% contraction from FY13e. Our assumptions factors in 3000Km of Roads order award every year with L&T's market share being 10%
Others 32.8 53.6 66.4 95.0 Orders from electrical, and MIP division
Unannounced orders 235.9 244.2 239.5 250.0
Exports (announced) 53.2 100.1 35.0 90.0
Total Orders Inflow (reported) 797.7 706.0 804.7 1003 Source: Deutsche Bank
Additionally, over the next 24 months the underground rail in Mumbai between Colaba to Andheri could start construction. This is a giant USD 6bn project. The growth areas for L&T include the fertilizers and water segments. To recap, the new urea investment policy could attract fresh capex of ~ INR500bn, and L&T has the potential to capture close to 25% of the market. And finally, in the power sector, thanks to the aggressive cost-cutting initiatives carried out by Larsen, the company appears ripe to garner 30-35% m/s vs. less than 10% last year, in our view.
We agree that railways have historically not driven new orders for Larsen and Toubro
Railways continue to represent a very small portion of the total order book for L&T. As seen in Figure 40, the maximum contribution of railways towards L&T’s infra order booking was 20% in FY11, and for other years it has remained well below 15%.
Our inflow assumptions factor
in 40% compression from
building and road
infrastructure
26 April 2013
Infrastructure
Indian Railways
Page 40 Deutsche Bank AG/Hong Kong
Figure 39: Merely ~4% of the aggregate order inflows
(FY09-December 2012) from railways
Figure 40: Railways represents a small portion of total
infrastructure order inflows
Railway orders4%
Other Order96%
Total Order Infllow from FY09 to FY13(till Dec'12):-INR3308bn
86 94
80 97 93
14 6
20 3 7
188bn 303bn 339bn
0
10
20
30
40
50
60
70
80
90
100
FY09 FY10 FY11 FY12 FY13 (tillDec'12)
Other Infra order Railway order(%)(%) 201bn 319bn
Source: Company Data, Deutsche Bank Source: Company Data, Deutsche Bank
Figure 41: Key orders in railways segment
Particulars From Period Value (INR bn)
Design and construction work of Elevated Corridor, Station buildings, Electrical & Signalling works and Railway Construction works
L&T Metro Rail (Hyderabad) Ltd Q4FY11 59.0
LSTK contract for first monorail system Mumbai Metropolitan Region Development Authority (MMRDA)
10-Nov-08 13.6
Cast Steel Wheel manufacturing plant in Bihar Indian Railways 8-Jul-08 10.5
Construction of tunnel between Shankar Vihar and Hauz Khas as well as underground stations.
Delhi Metro Rail Corporation 5-Nov-12 8.5
Railway electrification works between Guntakal –Raichur -Wadi stations of South Central Railway and construction, track work, signaling & telecommunication in the Lucknow and Izatnagar divisions of North Eastern Railway.
Rail Vikas Nigam Limited 26-Sep-12 5.4
Construction of a via-duct including Electrical, Signaling and Telecommunication works between Villupuram – Virudhachalam - Ariyalur section
Multiple 30-Dec-11 4.1
Delhi Metro Phase-II Delhi Metro Railway Corporation Limited Q4FY07 3.6
Construction of a via-duct, including two station buildings, for Kolkata Metro railway
Multiple 7-Dec-11 3.5
Design and construction of via-ducts and three elevated stations plus additional works from ongoing projects
Delhi Metro Rail Corp 7-Jun-12 3.5
Source: Company Data, Deutsche Bank
But L&T has build-out competencies in this segment
L&T, which has a strong presence in the E&C business, has over the past few years built competencies in delivering integrated railway projects which involve the construction of formation, bridges, track, OHE, signalling, etc. Projects such as JNPT doubling, railway siding and yard for the Hirmi Cement plant, Tiruvallur-Arakkonam third line, and Hyderabad metro clearly demonstrate its focus on strengthening its presence in the segment to capture a major part of the surge in railway capex. Effectively, rail orders can be divided into two segments: civil and systems. Within systems, L&T has competencies to do electrification and track work. What it does not have is competencies to do rolling stock, automatic fare collection and communications. But within India, L&T has become a very good integrator.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 41
Figure 42: Track record of L&T in integrated railway projects
Done Ongoing
25 kV AC OHE (Track km) 6550 3054
Rigid overhead contact (TKm) 40
Third Rail Electrification (TKm) 24 56
Traction Power Supply
Traction Sub-stations (AC/DC) 25 18
Gas Insulated 3
Switching Stations 220
Ballastless track work (Track Km) 350 1205
Ballastless track work (TKm) 10 110
Signalling
Centralised Traffic Control (nos) 1 -
Electronic Interlocking (Stations) 10 17
Panel/ Route Relay Inter (Stations) 40 22 Source: Company Data, Deutsche Bank
Our forecast factors in perils of downturn
We believe that the healthy order book coupled with declining commodity prices is likely to benefit the company. We have, however, factored in a 28bps decline in EBITDA margin (standalone) for FY14E. On the E&C segment front, we have assumed a margin of 11.3% in FY14E and FY15E, which is lower than the last six-year range of 11.5%-13.7%. This adequately reflects the risk of lower margins arising from heightened competitive intensity.
Figure 43: E&C revenue to grow at a CAGR (FY12-14E) of
16%
Figure 44: E&C margin expected to be lower than last six
years
-10
0
10
20
30
40
50
-
100
200
300
400
500
600
700
800
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
E
FY14
E
FY15
E
E&C revenue yoy change (RHS)(INR bn) (%) 14.0
12.6
11.7
10.1 10.0
8.5 8.0
8.5
11.5
12.8 13.0 13.6 13.7
12.7
11.6 11.3 11.3
6
7
8
9
10
11
12
13
14
15
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
E
FY14
E
FY15
E
(%)
Source: Deutsche Bank, Company data Source: Deutsche Bank, Company data
Considering the encouraging order awards announced in the March quarter, we estimate the company will report 15% growth in E&C revenue for FY14E. For FY15E, we believe that the E&C sales growth could be better at 17%. Standalone earnings for FY14 and FY15 are expected to grow at 11% yoy and 22% yoy.
Figure 45: Standalone sales/ PAT to increase at a three-year CAGR of 13%/8%
INR Bn FY12A FY13e FY14e FY15e 3 year CAGR
Sales 532 611 702 819 15
EBITDA 63 65 72 87 12
PAT 45 45 50 61 11
EBITDA % 12 11 10 11
PAT % 8 7 7 8 Source: Company Data, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 42 Deutsche Bank AG/Hong Kong
We have factored in sluggish order inflow and revenue growth
Considering the recent quarter encouraging order inflows and a sign of revival in the order inflow environment with massive orders expected in railways and urban infra segment, we revise our numbers for FY14E and FY15E. We have raised our order inflow numbers for FY14E and FY15E by 12% each. Accordingly, we have raised topline numbers for FY15E by 6%. On the margin front, we have raised our E&C margin assumptions for FY14E and FY15E by 25bps each. Overall, our revised estimates lead to standalone sales CAGR (FY13E-15E) of 16% and a standalone PAT CAGR (FY13E-15E) of 16%.
Figure 46: Raising our order inflow (E&C) numbers FY14e and FY15e by 12% each
PAT (INR m) 45,347 45,347 0 50,487 49,440 2 61,495 55,409 11
EPS (INR) 76.0 76.0 0 84.6 82.8 2 103.0 92.8 11
E&C margins (%) 11.6 11.6 - 11.3 11.0 25 11.3 11.0 25 Source: Deutsche Bank estimates
Where we differ from consensus
On standalone level our earnings estimates are 7%/4% lower than consensus for FY13E/FY14E. However, for FY15E, our earnings estimate is 5% higher than consensus.
Figure 47: Standalone FY15E earnings 5% ahead of consensus
EPS (INR/sh) 76 79 (4) 85 85 (1) 103 97 7 Source: Deutsche Bank, Bloomberg Finance LP
On a consolidated level, our earnings estimates are 9% / 5% lower than consensus for FY13E and FY14E. However, for FY15E, our earnings estimate is 6% higher than consensus.
Figure 48: Consolidated FY15E earnings 6% ahead of consensus
DB estimate Consensus Variation (%) DB estimate Consensus Variation (%) DB estimate Consensus Variation (%)
Revenues (INR bn) 786 740 6 896 843 6 1059 967 10
EBITDA (INR bn) 109 100 9 123 114 8 148 132 12
PAT (INR bn) 48 52 (9) 55 58 (5) 71 67 6
EPS (INR/sh) 78 85 (8) 91 94 (3) 117 109 7 Source: Deutsche Bank, Bloomberg Finance LP
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 43
Valuations
Raising our 12m target price to INR 2,045/sh
We continue to value L&T on an SOTP basis – Buy with a revised 12-month target price of INR 2,045. We use a target earnings multiple for the long-cycle engineering business of 20x FY14E (19x earlier), as these earnings adequately represent bottom-cycle numbers (also, 40% of the capital employed is working at low utilizations); and we use 20x FY14E (23x earlier) for the short-cycle engineering business, in line with peers from the engineering products business. 16-year P/E bands suggest the stock has historically traded between 6x and 47x earnings, with an average of 23x during FY06-10, and our target P/E multiple is lower than this average to factor in these negatives. Also, our current earnings estimate for the E&C division factors in losses of upcoming facilities, suggesting that our estimates are closer to bottom-cycle earnings.
For other businesses, we use the following method. 1) We assume L&T-IDPL’s investments at P/B of 1.0x FY13E; 2) we value the software division at P/E of 10x FY14E (in line with mid-cap peers); 3) we value L&T Finance Holdings at FY14 P/B of 1.5x, since the business has demonstrated RoEs of 16%, justifying this multiple; and 4) we do not apply any conglomerate discount, given that management has successfully listed L&T Finance Holdings to unlock shareholder value. Also, our earnings estimates already reflect significant ‘stress’ levels across the company’s businesses. Our SOTP-derived target price of INR 2,045/share implies a consolidated P/E of 22.6x FY14E.
Figure 49: SOTP valuation Segments PAT (INR
bn) BV (INR
bn) Valuation measure Market cap
(INR bn) Value
(INR/sh)Remarks
Long cycle engineering business 39.9 20x exit P/E 1yr forward 798 1,318 Mid-cycle multiples as 25% of CE is working at less than 10% utilization
Short cycle non E&C business 6.8 20x exit P/E 1yr forward 135 223 Lower than peers such as Cummins India, ABB India, Siemens India
Software company 6.9 10x exit P/E 1yr forward 69 113 In line with mid-cap peers
Finance companies 7.0 59 1.5x P/B for FY14 73 120 Adjusted for L&T's stake of 82.64%
L&T IDPL 90 1x P/B for FY13 90 149 L&T's effective share of NPV
Add: Invt in Infra & other subs 74 Price/Book of 1x 74 122 Valued at Book Value
Equity Value 1,239 2,046
Target price of L&T (rounded off) 2,045 . Source: Deutsche Bank
Reverse DCF suggests expectations could be met
We perform a reverse-DCF analysis (three-stage) to determine the market expectation of growth as implied by the current market price (INR 1,534). Our analysis suggests that the market is factoring in annual order inflow growth of 13% over the medium term (FY16E-21E). Figure 48 details our cash flow forecast; FY13-15 is the explicit forecast period, FY16-21 is the semi-explicit period and our terminal cash flow growth assumption is 2%.
Figure 51: Reverse DCF valuation to arrive at the current implied market valuation of E&C business
Enterprise value INR mn % of total NPV
NPV of Stage I 99,288 15%
NPV of Stage II 219,492 33%
NPV of TV 337,173 51%
NPV of FCFF 655,952 100%
Net cash/ (debt) (28,020)
Total market cap 627,933
Per share basis Sensitivity to key assumptions
NPV of Stage I 163 Cost of Equity (%)
NPV of Stage II 361 Terminal growth rate
(%)
1,178 11.18 12.18 13.18 14.18 15.18
NPV of TV 554 - 1,114 1,018 938 869 810
NPV of FCFF 1,077 1.00 1,180 1,071 981 904 839
Net cash (46) 2.00 1,261 1,135 1,031 945 872
Total Equity Value 1,031 3.00 1,361 1,212 1,092 993 911
4.00 1,490 1,308 1,165 1,051 957 Source: Deutsche Bank
Stock is trading in lower quartile of trading band
The stock is currently trading at a forward EV/EBITDA multiple of 11.7. The historical bands suggest the stock has historically traded between 7x and 28x with an average of 14x during FY06-12. On an EV/order book basis too, the stock is trading at 0.80x vs. an average of 1.05x, with a range between 0.58x and 2.22x seen during the same period.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 45
Figure 52: Stock is trading in the second quartile of the
long term 1-year forward EV/order book bands
Figure 53: Stock is trading in the second quartile of the
long term 1-year forward EV/EBITDA bands
-500
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Apr
-97
Apr
-98
Apr
-99
Apr
-00
Apr
-01
Apr
-02
Apr
-03
Apr
-04
Apr
-05
Apr
-06
Apr
-07
Apr
-08
Apr
-09
Apr
-10
Apr
-11
Apr
-12
Apr
-13
Price (INR) 0.5 0.9 1.3 1.7
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
Apr
-95
Apr
-96
Apr
-97
Apr
-98
Apr
-99
Apr
-00
Apr
-01
Apr
-02
Apr
-03
Apr
-04
Apr
-05
Apr
-06
Apr
-07
Apr
-08
Apr
-09
Apr
-10
Apr
-11
Apr
-12
Apr
-13
Price (INR) 6 12 18 24
Source: Deutsche Bank, Annual reports, Bloomberg Finance LP Source: Deutsche Bank, Annual reports, Bloomberg Finance LP
On a P/E basis, the stock is trading in the upper end of the second quartile of the long term 1-year forward P/E band. Historically, the stock has traded within a range of 10.7-46.3x during FY06-12.
ULTC: by far the biggest beneficiary in cement sector; remains top sector pick In the Indian cement sector, UltraTech (ULTC) should be amongst the biggest beneficiaries of the upcoming railway capex for the following three reasons: a) it has possibly the best access to the upcoming network for despatches; b) 75% of its capacity is in close proximity to the areas falling under the rail capex; and c) it is one of the few companies coming up with dedicated bulk terminals in southern India, a region that’s bereft of any upcoming freight corridors, and this can prove to be the key differentiator. Our revised estimates factor in 12% volume growth for FY15E (vs industry volume growth of 8%) leading to a 7% increase in FY15E EPS (6% above consensus).
An early-cycle beneficiary UltraTech, with 43mt of cement capacity (75% of total sales) catering to regions of the DFC and the DMIC, is likely to be the biggest cement demand beneficiary of the 1,100 sq km of area being developed in these regions. Jaiprakash, with 25mt of cement capacity (70% of its sales), is a distant second. A 5% higher utilization in the forecast period raises our FY15E earnings by 7%.
Logistics initiatives could emerge as the key differentiator UltraTech has also taken a big lead over peers in investing in logistics, in terms of both handling and shipments. With logistics accounting for 35% of the total cost of cement, the differential owing to a vertically integrated structure on sustainable margins is likely to be quite high. An INR200/t lower freight (vs. current freight cost of INR1,200/t) could widen the profitability gap between UltraTech and large-cap peers to INR200-450/t (vs. current gap of INR 0-350/t).
Retaining Buy with a target price of INR2,100/share; risks We continue to use an average of FY14E P/E of 18x and EV/EBITDA of 10x to arrive at our 12-month target price. Key downside risks are near-term demand concerns having a bearing on prices and an adverse ruling in the ongoing competition case.
OLD DB EPS FD(INR) 51.24 89.26 96.87 115.11 131.89
% Change 0.0% 0.0% 0.0% 0.0% 6.8%
DB EPS growth (%) -41.6 74.2 8.5 18.8 22.3
PER (x) 19.6 12.8 19.7 16.6 13.5
EV/EBITDA (x) 10.9 7.9 11.6 9.9 7.9
Yield (net) (%) 0.6 0.7 0.5 0.5 0.5Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
Logistics initiatives could emerge as the key differentiator
Cement companies with proximate plants to markets or superior connectivity to logistics networks clearly enjoy an advantage on the industry cost curve – given the inherent characteristics of the product being extremely voluminous and lowest in terms of value add (c35% of overall costs).
Figure 55: Freight forms almost 35% of the overall cost of cement
Raw material15%
Freight34%
Power and fuel33%
Others18%
Source: Company data, Deutsche Bank
ULTC is poised to move further down the industry cost curve, thanks to its logistics initiatives
Figure 56: Reported EBITDA/t differential to large cap peers has narrowed
0
200
400
600
800
1,000
1,200
1,400
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
9MFY
13
ACC Ambuja UltraTech(INR/t)
Source: Company data, Deutsche Bank. Normalized data for fiscal years ending March
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 49
ULTC, already among the lowest-cost producers of cement in India, is poised to improve its competitiveness further and emerge as the biggest beneficiary of the upcoming railway capex.
Its plants have possibly the easiest access to the network Among the cement industry players, ULTC probably has a larger proportion of its capacity with easy access to upcoming and existing railway networks.
Figure 57: Its lead in installing dedicated bulk terminals and plants with proximity to upcoming network could further
improve its competitiveness
Source: Ministry of Railways, Dedicated Freight Corridor Corporation of India Ltd, Company data, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 50 Deutsche Bank AG/Hong Kong
Among the biggest exposures to states benefiting from DFC capex With over 60% of its overall sales in these markets, ULTC is likely to emerge as one of the largest beneficiaries of the rail capex being undertaken, the related allied infrastructure being created and the overall likely improvement in economic activity in these regions (as in the case of NHAI capex in the early 2000s).
Possibly the only player with dedicated bulk terminals near key markets in South India In South India, where such a network has yet to be conceived, ULTC’s lead in coming up with dedicated bulk terminals near key markets could prove to be the key differentiator. Please note that South India has the highest level of oversupply in the country and lacks inexpensive logistics infrastructure to move this material to neighbouring regions over long distances. Accordingly, the southern region is likely to remain a key constraint to inter-regional flow and the consequent impact on the demand-supply balance.
We raise FY15E earnings by 7% (6% above consensus)
We have revised our volume growth assumptions from 7% in FY15E to 12% vs industry volume growth of 8%) given the company’s higher presence in the markets where the DFC and the DMIC are coming up, and the company’s latent capacities in these regions. This has led to a 7% increase in our FY15E EPS to INR140/share (6% above consensus).
Figure 58: Our estimates are now 6% above consensus
FY14E FY15E
Particulars Revised Old Variation (%) Revised Old Variation (%)
Net Sales 224,282 224,282.2 - 263,574 253,691.2 3.9
EBITDA 54,788 54,788.3 - 66,572 63,459.6 4.9
PAT 31,560 31,560.1 - 38,613 36,160.7 6.8
EPS 115.1 115.1 - 140.8 131.9 6.8
Consensus EPS 113.8 133.1
% Above consensus 1.1 5.8Source: Bloomberg Finance LP, Deutsche Bank
Retaining Buy with a target price of INR2,100/share; risks
While near-term concerns on demand growth remain, the group’s cost leadership, upcoming expansions, and strong balance sheet provide comfort. On the valuations front, the stock is trading at replacement cost, which, considering the likely sector upturn in the coming 12-18 months, seems attractive. Please note that in the previous cycles, industry leaders ACC and Ambuja traded at up to a 100% premium during an upturn. Given that the company is emerging as the industry leader in terms of both capacity and profitability, this seems reasonable. Buy.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 51
Figure 59: Trading at replacement cost, which, considering the likely sector upturn in
the coming 12-18 months, seems attractive
-20 40 60 80
100 120 140 160 180 200
Aug
-04
Jan-
05
Jun-
05
Nov
-05
Apr
-06
Sep-
06
Feb-
07
Jul-0
7
Dec
-07
May
-08
Oct
-08
Mar
-09
Aug
-09
Jan-
10
Jun-
10
Nov
-10
Apr
-11
Sep-
11
Feb-
12
Jul-1
2
Dec
-12
EV/Ton Replacement Value/ton(US$/t)
Source: Deutsche Bank
We continue to use an average of FY14E P/E of 18x and EV/EBITDA of 10x to arrive at our 12-month target price. The multiples are at a premium to large-cap peers ACC and Ambuja, largely on the back of the company emerging as the industry leader in terms of both capacity and profitability. This is in line with previous cycles, when industry leaders typically commanded a premium to peers.
Risks Key downside risks are near-term demand concerns having a bearing on prices or an adverse ruling in the ongoing competition case. Furthermore, any acquisition at a significant premium to replacement cost that is not earnings-accretive could pose a downside risk.
26 April 2013 Infrastructure Indian Railways
Page 52 Deutsche Bank AG/Hong Kong
Reuters Bloomberg APSE.NS ADSEZ IN
Operating leverage + large SEZ land bank = a heady concoction Adani Ports & SEZ (APSEZ) could be one of the largest late-cycle beneficiaries of the upcoming DFC and DMIC capex, given (a) it has 270m tonnes of capacity across four ports, which are currently operating at below 50% utilisation; (b) the possible impact on the parent company’s large trading operations, with likely market share gains; and (c) an improved outlook for APSEZ’s large land bank in the SEZ area, given its multi-modal connectivity and the increasing challenges for land acquisition in the country. We retain Buy with a target price of INR172/sh.
Operates four underutilised ports with evacuation infrastructure along the DFC APSEZ has four large port facilities with a cumulative cargo handling capacity of 270mt (currently operating below 50% utilisation). In this scenario, the upcoming railway and industrial capex could create an entirely new level of cargo demand for these ports and drive operating leverage-led earnings growth for APSEZ. According to our model, a 1% higher market share in a 1% incremental demand growth scenario lifts our NPV by 4%.
The large land bank could gain value in the current scenario APSEZ’s 15,995 acre land bank (probably India’s largest port-based industrial area), with its multi-modal connectivity and large power facilities, offers an ideal location for industry. With land acquisition becoming increasingly challenging, this land bank could become an attractive location for a host of industries – particularly when the DFC and DMIC are ready.
Retaining Buy with a target price of INR172/sh (based on NPV); risks We use the SOTP of all port concessions, wherein the concession value is estimated using NPV with zero terminal value (using 12.91% CoE), to arrive at our target price. Key downside risks: consensus downgrades following weak economic activity and any acquisition at a significant premium to replacement.
Yield (net) (%) 1.0 0.7 0.8 0.8 0.8Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 53
Model updated:17 April 2013
Running the numbers Asia
India
Logistics
Adani Ports & SEZ Ltd Reuters: APSE.NS Bloomberg: ADSEZ IN
Buy Price (26 Apr 13) INR 144.50
Target Price INR 172.00
52 Week range INR 108.00 - 155.85
Market Cap (m) INRm 289,490
USDm 5,342
Company Profile Adani Ports & Special Economic Zone (APSEZ) - a part of India's leading infrastructure conglomerate the Adani Group - is India's largest private multi-port operator. APSEZ is the only private sector port operator with presence across six ports in India. The company's aim is to increase annual cargo handling capacity from 78 million MT in 2012 to 200 million MT by 2020.
Price Performance
105
120
135
150
165
Apr 11Jul 11 Oct 11Jan 12Apr 12Jul 12 Oct 12Jan 13
Operates four underutilised ports with evacuation infrastructure along DFC
APSEZ, a late-cycle beneficiary of the DFC and DMIC capex, has four large port facilities with a cumulative cargo-handling capacity of 270mt, which are currently operating at below 50% utilisation. In this scenario, the upcoming railway and industrial capex could create an entirely new level of cargo demand for these ports and drive operating leverage-led earnings growth for APSEZ. According to our model, a 1% higher market share in a 1% incremental demand growth scenario lifts our NPV by 4%.
Figure 60: APSEZ has 270m tonnes of cargo-handling facilities along the DFC and
DMIC that are currently operating at below 50% utilisation
Mumbai
DFC Line (Parallel)
Delhi
Dankuni
Ludhiana
Feeder Line
Okha
Pipavav
Vasai Rd ThaiDiva
Valsad
Vadodara
Ahmedabad
HaziraRajkot
Kandla PortMundra Port
Gandhidham
MehsanaPalanpur
Virangam
LuniJodhpur
Marwar Jn
Phulera
JaipurTundla
Agra
RewariHissar
Katni
Paricha
KanpurUnchahar
Mugalsarai
Aligarh
Panipat
Hapur
MerrutSaharanpur
AmbalaChandigarh
Gomoh
BondamundaChakradharpur
Tata Nagar
Anansol
SonNagar
DurgapurChandil
Allahabad
Harduaganj
AmritsarNagal Dam
Lines proposed to be constructed
HassanMangalore
ObulavaripalliKrishnapatnam
Paradip
HaridaspurAngul
Sukinda
KhurdaAstaranga
Dhamra Port
Bhadrak
Dighi Port MangaonIndapur
Jaigad PortKarbude
APSEZ’ port facilities
Source: DFCCIL, Company data, DMIC, Deutsche Bank
Could continue to gain from parent’s large trading business
Adani Enterprises (AEL), the parent company of Adani Ports & SEZ, has one of the largest trading operations in the country and is the market leader in coal imports into
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 55
the country (for its power subsidiary, as well as for third-party customers). In FY12, AEL imported 36m tonnes, which it aims to increase to 100m tonnes in FY20. This large trading operation is spread across both its own facilities and other ports (both major and minor) in the country. The upcoming DFC and DMIC development could effectively open up a new level of demand for the parent’s trading business and the port could continue to gain from this.
Figure 61: Its newer ports can benefit from the parent group channelling traffic from a
wide clientele spread across the country
Source: Company data, Deutsche Bank
The large land bank could gain value in the current scenario
APSEZ’s 15,995 acre land bank (probably India’s largest port-based industrial area), with its multi-modal connectivity and large power generation facilities, offers an ideal location for most industries. With land acquisition becoming an increasingly challenging exercise in the country, this land bank could become an increasingly attractive asset for a host of industries – particularly when the DFC and DMIC are ready.
Retaining Buy with a target of INR172/sh (based on NPV)
As with other ports, we use the SOTP of all port concessions, wherein the concession value is estimated using NPV with zero terminal value (using 12.91% CoE) to arrive at our target price. We believe this is reasonable, considering that the company seems to have built a business model for managing long-duration port concessions (25 years-plus in most cases) across six ports on the Indian coastline, and also the company’s firm long-term contracts with some large customers. Note that our CoE of 12.91% for operational ports is based on Deutsche Bank’s estimates of a risk premium of 7.9% for India and a risk-free rate of 5.8%. We use a beta of 0.9. For projects under development, we assume a 20% higher beta to factor in the development risk.
Other ports
APSEZ terminals
Haldia
Paradip
Vizag Port
Gangavaram port
Kakinada Port
Ennore port
Tuticorin,
Murmugao Port
Bedi port
Pipavav port
Kandla port Mundra port
Navlakhi port
North
East
South
West
Power Plants (coal supply by Adani Enterprises)
Kolaghat
Bandel
Durgapur
Sagardighi
BakreshwarMejhia
Kahalgaon
Tanda
Vindhyanchal Rihand
Panki
KorbaSipat Talcher
Koradi Chandrapur
Parli
Ramagundam
Kondapalli Simhadri
North Chennai
Mettur
Chhabra
Wanakbori Gandhinagar
Kota
SuratgarhHissar
Panipat Yamunanagar
UnchaharParichha
Dadri
Harduaganj
26 April 2013
Infrastructure
Indian Railways
Page 56 Deutsche Bank AG/Hong Kong
Figure 62: Our 12-month target price is derived using SOTP of all port concessions
(concession value estimated using NPV with zero terminal value)
SOTP INR/Sh Remarks
Mundra Port 147 NPV using CoE of 12.91%
Dahej Port 14 NPV using CoE of 12.91%
Hazira Port 9 NPV using CoE of 12.91%
Mormugao 1 NPV using CoE of 14.33% incl 20% higher beta for execution risk
Vizag 1 NPV using CoE of 14.33% incl 20% higher beta for execution risk
Kandla 0 NPV using CoE of 14.33% incl 20% higher beta for execution risk
Abbot Point - Book value 1
1x Book value (9MFY13E estimated BV as per quarterly earnings release)
Total NAV (INR/sh) 172
Exit P/B (x) 4.9
Exit P/E (x) 22.6
Exit EV/EBITDA (x) 14.7 Source: Company data, Deutsche Bank estimates
Risks
Key downside risks: Delay/pushback in the Abbot Point assets being transferred to the Adani
promoter family, resulting in debt remaining elevated in the forecast period and multiples drifting down.
Assets getting transferred below book value of INR1.3bn – resulting in the Street using a significant conglomerate discount for valuations (Deutsche Bank estimates assume no conglomerate discount, as we have not estimated any value for land owned by company).
Consensus downgrades following weak interims due to low economic activity.
Acquisitions at a significant premium to replacement.
Key sensitivities Our earnings model implies that 1% higher market share raises our FY14E EPS by 1.5% and has a 30bp RoE impact. Furthermore, a % higher All India volume growth is likely to help see a 4% rise in FY14E EPS and a 80bp RoE impact. Lastly, a 1% change in WPI inflation impacts EPS by 5% and leads to 90bp RoE expansion.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 57
This page has been left blank intentionally
26 April 2013
Infrastructure
Indian Railways
Page 58 Deutsche Bank AG/Hong Kong
Reuters Bloomberg NTPC.BO NTPC IN
A late-cycle beneficiary through better fuel availability; preferred Buy NTPC’s stock has underperformed the Sensex by ~20% over the past 12 months, primarily due to 15-16 quarters of earnings disappointment, nil generation growth and a decline in the availability of plant (PAF) − leading to a decline in ROEs and limited EPS growth. While in the near-to-medium term, improving coal availability from higher coal production would offer respite, building up the freight corridor and PPP lines of Coal India and NTPC could alter the availability paradigm back to 92% levels vs. our long-term forecast of 87%. Our DCF value for this change consequently rises by 9%. At 1.4x P/B, valuations are attractive; we reiterate NTPC’s top-pick status and Buy rating.
10.5GW capacities to get fillip from DFC The development of the East-West dedicated freight corridor could help the movement of coal through the eastern coal belt to NTPC’s northern coal projects. 10.5GW capacities, which receive less coal as of now, are likely to see the most benefit. Dadri, a non pit-head project, could be a key beneficiary. Amongst the expansion projects, 1GW Rihand III and 0.5GW Vindhyachal-V could get the benefits of better logistical connectivity.
Management focus to be back on core competence of power generation Over the last few years, management’s focus has shifted from new capacity to fuel sourcing. A rise in fuel availability through better rail corridors would allow NTPC to refocus on growth of the core power business. Our estimates factor in 8.5% book growth; 2% higher growth from FY17E raises DCF value by 7%.
SOTP and P/B for 12-month target price; key risks (refer pp63-65 for detail) Our 12-month TP is INR180/sh. We have used the average of a three-stage DCF and exit P/BV multiple to value the regulated earnings business model of NTPC. Valuations are attractive at 1.4x P/B and 10x PE for a utility model – at a 30% discount to historical averages and a ~15% discount to comparable regional peers such as CLP/KEPCO. Risks: lower coal availability (imbroglio with CIL), major delay in new mines and regulatory tightening, if any.
ROE (%) 14.2 13.6 13.7 14.4 14.1Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 59
Model updated:16 April 2013
Running the numbers Asia
India
Utilities
NTPC Limited Reuters: NTPC.BO Bloomberg: NTPC IN
Buy Price (26 Apr 13) INR 154.80
Target Price INR 180.00
52 Week range INR 138.10 - 174.45
Market Cap (m) INRm 1,276,397
USDm 23,552
Company Profile NTPC Limited, established in 1975, is India's largest thermal-power generating company, and also the country's largest power utility. NTPC's installed capacity, as of 1 March 2013, is 40,174 MW, through its 15 coal-based and 7 gas/liquid fuel-based (3,955 MW) projects, and its 5 JVs. NTPC is aggressively increasing capacity through greenfield projects and expansion of existing stations, and foray into hydro-power and non-conventional and nuclear power generation.
Price Performance
135
150
165
180
195
Apr 11Jul 11 Oct 11Jan 12Apr 12Jul 12 Oct 12Jan 13
NTPC has submitted firm proposals for PPP with Indian Railways
According to the Ministry of Railways, NTPC’s proposals for rail infrastructure investments could qualify under new the PPP program – implying no cap on returns; i.e., investments would not be RoE dilutive. To recap, NTPC, alongside Indian Railways, is working on 7-8 common feeder lines, especially for coal evacuation from the central coal belt for its power projects / captive mine evacuation (see Figure 63).
Figure 63: Railway feeder lines for NTPC mines / power projects
Project Rail feeder line Current status Completion
Captive Coal
Pakri Barwadih Hazaribagh-Banadag Line Construction by EC Railways from Nov'12
Completion by April'13
Chatti Bariatu & South Kerandari
Tori-Shivpur & Shivpur-Kathautia
Forest clearance and land acquisition to be done
Not certain - CCI to take up
Shivpur-Chatti Bariatu Feasibility study in progress NA
Power project
Barh
Hazaribagh-Koderma Manpur rail over bridge INR 1.44bn funded by NTPC
Work to start in Apr'13
Koderma-Tilaiya line Forest clearance of Bihar pending
NA
Mouda Line from Chacher station Plan approved NA
Solapur Rail-over bridge at Hotgi Railway started work 14-15 months
Khargone Gauge conversion from Khandwa
DPR approval with Railways NA
Kudgi Doubling Hotgi-Bilaspur-Kudgi line
Cost sharing proposal with railways
NA
Source: Company, Ministry of Railways, Deutsche Bank
We forecast 10.5GW (27% of NTPC’s capacity) to get fillip from DFC post FY17e
The development of the East-West dedicated freight corridor could help the movement of coal through the eastern coal belt to a few of NTPC’s northern coal projects. While 11.7GW of projects will be connected via feeder lines to DFC, most of the benefits are likely to be for 10.5GW capacities, which receive less coal as of now. Dadri, a non pit-head project, could be a key beneficiary.
Among the expansion projects, 1GW Rihand III and 0.5GW Vindhyachal-V could get the benefits of better logistical connectivity. The rest of the expansion in capacity over the next four years is planned to come in the states of Bihar, Maharashtra, Karnataka and Tamil Nadu, and may not see any significant direct gains.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 61
Figure 64: New feeder lines reach to NTPC projects
Mumbai
DFC Line (Parallel)
Delhi
Dankuni
Ludhiana
Feeder Line
Okha
Pipavav
Vasai RdThai
Diva
Valsad
Vadodara
Ahmedabad
HaziraRajkot
Kandla PortMundra Port
Gandhidham
MehsanaPalanpur
Virangam
LuniJodhpur
Marwar Jn
Phulera
JaipurTundla
Agra
RewariHissar
Katni
Paricha
KanpurUnchahar
Mugalsarai
Aligarh
Panipat
Hapur
MerrutSaharanpur
AmbalaChandigarh
Gomoh
BondamundaChakradharpur
Tata Nagar
Anansol
SonNagar
DurgapurChandil
Allahabad
Harduaganj
AmritsarNagal Dam
Lines proposed to be constructed
HassanMangalore
ObulavaripalliKrishnapatnam
Paradip
HaridaspurAngul
Sukinda
KhurdaAstaranga
Dhamra Port
Bhadrak
Dighi Port MangaonIndapur
Jaigad PortKarbude
Source: Deutsche Bank
Figure 65: NTPC projects – beneficiaries of expansion in railway network
Project Type FY13 Cap (MW)
Issues
Singrauli Pithead 2,000 Lower coal availability due to mine expansion delays
Rihand Pithead 2,500 Additional unit added – back-down by discoms and planned outage
Vindhyachal Pithead 3,760 Additional unit added, lower domestic coal availability
Tanda Non-Pit 440 Planned outages, and back-down by states
Dadri Thermal Non-Pit 1,820 Less coal for new units and severe back-down by discoms
Unchahar Non-Pit 1,050 NA
Expansion
Rihand – III Pithead 1,000 Likely to commission by 2013-14
Vindhyachal – V Pithead 500 Likely to commission by 2013-14 Source: CEA, Company, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 62 Deutsche Bank AG/Hong Kong
Historically, fuel availability has been the bane of some plants’ operations
NTPC’s 10 super thermal projects, totaling 21GW (55% of total capacity), have suffered generation loss and lower utilization rates in recent years. This has been due to lower fuel availability, as a result of delays in coal mine expansion and/ or limited logistics to ferry domestic coal. Also, various bottlenecks in railways from ports have led to limited movement of imported coal to projects in North India – especially the one at Mughalsarai junction. Logistical issues have been one of the key factors leading to lower ROEs and loss of incentives.
Talcher TPS Pithead 470 87 93 91 94 93 94 NA Sipat-II - Unit IV and V
Pithead 2980 0 54 93 97 80 74 New expansion, technical issues led to forced outages
Ramagundam Non-Pit 2,600 90 94 95 90 93 91 NA
Simhadri Non-Pit 2,000 89 97 97 64 93 72Outages; coal handling not well equipped to handle imported coal
Source: CEA, Company, Deutsche Bank
Accordingly, average PLF has declined by 9% in last three years, and our forecast factors in average PLF and availability
The average utilization factor (PLF) for NTPC’s coal projects has declined by 9ppts over the last three years, since the inception of coal availability constraints in the system. Similarly, plant availability (PAF) has dropped by 3ppts over the same timeframe and we assume in our forecasts that it will fall by a further ~2ppts. Gas projects have seen a massive 14ppt correction in PLFs over the past two years, as KG-D6 gas availability has declined sharply, and we assume in our forecasts that PLFs will fall by a further 6ppts in FY14E.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 63
Figure 67: PLF and PAFs have weakened over the last three years, and future
assumptions do not build in any recovery
50%
60%
70%
80%
90%
100%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
e
FY15
e
FY16
e
FY17
e
PLF- Coal PLF- Gas PAF- Coal
ForecastReported
Source: Company, Deutsche Bank
Sensitivity to earnings and ROE is material
A 500bps improvement in plant availability and utilization factors over a five-year period could increase ROEs by 100bps to over 15%, and earnings could get an additional 9-10% fillip over the current base case estimates of mild recovery.
Our SOTP and DCF estimated fair valuation is at INR180/sh
We use the average of a three-stage DCF methodology and a target exit P/BV multiple to arrive at a target price of INR180/sh. The DCF approach is based on a three-stage forecast of cash flows. Stage 1 covers an explicit forecast over FY12-17E. Stage 2 assumes a semi-explicit period of FY18-22E with free cash flow growth at a 6% CAGR. Stage 3 is the terminal growth phase, with a terminal growth rate of free cash flow assumed at 3%.
Our cost of equity is 12.4% (no change), based on a risk-free rate of 8.1%, an equity risk premium of 5.3% and beta of 0.8. Our terminal growth rate of 3% looks reasonable as it is lower than the long-term GDP forecast of 6-7% for India. This yields a value of INR185/sh.
In addition, we have used a sum-of-the-parts valuation methodology wherein we have maintained exit P/BV for the operating power assets at 2.25x FY14E, as the RoE of these assets are assumed to remain within a 21-23% range, based on our current forecast. We have used the exit P/B of 1.5x for the power assets under implementation, in line with the Gordon Growth Model, and 1x for investments and cash. We have valued the coal assets using NPV methodology, considering 14% cost of equity. This SOTP approach yields a value of INR175/sh. The average of the two methods results in INR180/sh, which is our target price for NTPC.
26 April 2013
Infrastructure
Indian Railways
Page 64 Deutsche Bank AG/Hong Kong
Figure 68: NTPC SOTP valuations
Valuation multiple Value in Rs bn Value in Rs/share
Operating assets 2.25x FY14E regulated book 779 94
Investment in JVs and Subs 2.25x FY14E invested equity 161 20
Equity in CWIP 1.5x equity portion of FY14E CWIP 135 16
Investments 1x FY14E 39 5
Cash and cash equivalents 1x FY14E 215 26
Mining assets as on FY13E NPV at CoE of 14% 103 12
Average of the two methods 1,485 180Source: Deutsche Bank estimates
Sharp 30% discount to historical averages
Certainty of earnings and growth visibility does not seem to be factored into current NTPC valuations, which are at a historically high 30% discount to the historical mean, due to coal unavailability issues. Improving domestic coal visibility is likely to be positive for driving NTPC’s operating leverage and, in turn, a re-rating.
Figure 69: NTPC 22% discount to mean should revert as ROE decline reverses
1.4x
1.9x
12.0
12.5
13.0
13.5
14.0
1.2
1.4
1.6
1.8
2.0
2.2
2.4
2.6
2.8
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
Jul-1
2
Jan-
13
Jul-1
3
Jan-
14
Jul-1
4
Jan-
15
Price/Book - C Mean ROE (RHS)
Median & Mean
(x) (%)
29% discount to mean
Source: Company data, Bloomberg Finance LP, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 65
Risks
Unavailability of reasonable domestic coal, and hence the loss of marginal ROE Lower coal availability – either from Coal India or logistics challenges in transporting imported coal to its project site – has affected the company’s generation (read PLFs) and availability-led incentives (read PAF).
Figure 70: PAF and PLF have seen significant decline over past 2-3 years
70%
75%
80%
85%
90%
95%
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
e
FY14
e
FY15
e
PAF PLF
Source: Company data, Deutsche Bank
Delays in captive coal mining, which can accentuate the above concern In its last presentation, the company highlighted a 37mt revised target for the captive coal mining business by 2017. We, however, forecast 23mt of coal production, leaving a shortfall of 14mt of coal, which needs to be filled either by imports (~9mt) or by curtailing output – leading to lower utilization rates (PLF) for its projects. The reason for our lower assumptions are: a) work-speed being affected at three mines de-allocated by the Coal Ministry in June 2011 and re-allocated after 1.5 years; b) land acquisition issues; c) local unrest; and d) delays in the development of evacuation infrastructure (Tori-Shivpur railway line) for coal evacuation.
Figure 71: Captive coal mining estimates
-3
8.5
19.5
37
-3
5
13
23
0
5
10
15
20
25
30
35
40
FY13 FY14 FY15 FY16 FY17
NTPC DBe
(mnt)Source: Company data, Deutsche Bank estimates
26 April 2013
Infrastructure
Indian Railways
Page 66 Deutsche Bank AG/Hong Kong
Reuters Bloomberg COAL.BO COAL IN
Evacuation of stuck coal is not a distant dream Current efforts to augment railway infrastructure have three-fold long-term positive effects on Coal India (CIL). Firstly, the new feeder lines planned by CIL would enable it to raise long-term annual mine production by 290mt (64% of FY13 production). Secondly, upcoming eastern corridor would beef up its desptach capacity, especially in northern India (40% of current despatches). Lastly, track access charges on new corridors are likely to be one-third of the current charges potentially giving CIL some pricing power, which is currently limited by high transportation cost. However, we retain Hold as we find CIL has limited pricing power in the near term.
Upcoming rail Infrastructure – a panacea for its long-standing problems The lack of an adequate rail line and rake availability has constrained CIL time and again with inventory levels back to c60mt in Mar’13 (vs. 45mt in Dec’12). CIL is planning to lay three new railway lines (feeder lines) in Jharkhand, Chhattisgarh and Odisha, which could help tap c290mt from existing and new coal mines. Moreover, with c200mt of CIL’s freight movement with leads greater than 100km proposed along the eastern Dedicated Freight Corridor (DFC), the extent of any inventory build-out post FY2017e would be limited (from weak demand).
An indirect benefit from new railway line could be flexibility in pricing With transportation costs greater than the price of coal, a drop in transportation costs could give some leeway to CIL for greater market-linked prices. Additionally, our sensitivity analysis suggests if CIL is able to ship out 100mt more coal annually from FY18e, our life-of-mine DCF rises by 10%.
We value CIL on average of life-of-mine DCF and P/E; maintaining Hold We continue to value CIL on an average of P/E and life-of-mine DCF. On the P/E methodology, we valued the regulated sales business at 14x FY14E, in line with the utilities business, and the merchant sales business at 7x FY14E. We agree that a high FCF yield of 11% provides downside support, but we remain concerned on upcoming interims owing to CIL’s ability to pass through costs. Accordingly, a higher/lower-than-expected price change is the key up/down risk.
Rating
Hold Asia India Resources Metals & Mining
Company
Coal India Limited
New rail network could completely revamp Coal India
Yield (net) (%) 1.2 2.8 3.2 3.3 3.5Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items, 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 67
Model updated:23 April 2013
Running the numbers Asia
India
Metals & Mining
Coal India Limited Reuters: COAL.BO Bloomberg: COAL IN
Hold Price (25 Apr 13) INR 317.05
Target Price INR 345.00
52 Week range INR 294.45 - 382.35
Market Cap (m) INRm 2,002,603
USDm 36,952
Company Profile Coal India Limited produces and markets coal and coal products, and provides related consulting services. It has extractable coal reserves of 22.3bn tons. CIL is an apex body with 7 wholly owned coal producing subsidiaries and 1 mine planning and consultancy company. It also has a mining company in Mozambique ("Coal India Africana Limitada").
Price Performance
280
320
360
400
440
Apr 11Jul 11 Oct 11Jan 12Apr 12Jul 12 Oct 12Jan 13
Despatch growth has started to lag production growth once again
Coal India transports c70% of its output by rail (including MGR), which is the most cost-effective method considering its transportation needs spans long distances. While CIL’s continued co-ordination with the Indian Railways, slower economic activity and ban on iron ore exports have enabled it to lower inventory levels from 72m tonnes to less than 45m tonnes (December 2012), the lack of rail lines and rake availability at its mines has once again led to a rise in its inventory levels to c60m tonnes in March.
Figure 72: Over 70% of CIL’s despatches are through rail Figure 73: Inventory has once again started to pile up
Rail53%
Road26%
MGR18%
Other modes3%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
Mar
-12
Apr
-12
May
-12
Jun-
12
Jul-1
2
Aug
-12
Sep-
12
Oct
-12
Nov
-12
Dec
-12
Jan-
13
Feb-
13
Mar
-13
Inventory (mnt)
Source: Deutsche Bank Source: Company Data, Deutsche Bank
Coal India planning to install new railway lines to sustain volume growth
To address this issue and to support its expansion plans across new mines, CIL is planning to lay new railway lines for dedicated coal evacuation in the eastern region of the country. A look at Figure 74 reveals that close to 290mt of coal across three coalfields of CIL subsidiaries and 8mt of coal across Singareni Colleries is stuck due to lack of infrastructure in these regions. Media reports suggest that that the company has set aside close to INR70.45bn for building infrastructure in three lines, i.e. the Tori-Shivpur line in Jharkhand, the Bhupdeopur-Korichappar-Korba line in Chhattisgarh and the Jharsuguda-Barpali line in Odisha.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 69
Figure 74: Coal evacuation in 12th Plan hampered due to lack of rail infrastructure
Railway Line Length (km) CIL/ CIL subsidiary
Coal Field Area Potential coal evacuation (m
tons)
Remarks
Tori-Shivpur-Hazaribagh
Tori-Shivpur section (44Km)
Shivpur-Kathotia (47
Km)
CCL North Karanpur
Jharkhand 100 Tori-Shivpur section about 44km has been accorded Stage-1 forest clearance. NoC under FRA 2006 obtained from DC, Chatra, and the same is awaited from Latehar, which is expected shortly. Completion of Tori-Shivpur section is critical as projects like Magadh {20mtpa), Amrapali (12 mtpa), Koed Manatu (10 mtpa) and Pachra (15 mtpa) can come up only after completion of Tori-Shivpur section. Railways would finalise the tender for construction of Tori-Shivpur line by December 2013.
Bhupdevpur-Korichhapar/Baroud-Dharamjaygarh up to Korba
180 SECL Mand Raigarh Chhattisgarh 100 In-Principle clearance from the Planning Commission has been obtained for Bhupdeopur-Korichhapar/ Baroud section. Railways to seek approval of the cabinet for formation of SPV. Project to be taken up as deposit work by Railways for a single line initially, which will be converted to double line subsequently.
Jharsuguda-Barpali
52 MCL lb & Talcher Odisha 90 Land acquisition by the Railways is progressing very slowly. The slow progress is also due to inadequate manpower provided by the Railways. Forest Clearance is an issue. NoC to be obtained from Jharsuguda and Sundergarh districts. MCL will fund the entire project.
Sattupalli-Bhadrachalam Road rail line
60 SCCL Sattupalli opencast
project
Andhra Pradesh
8 SCCL would fund the entire project cost of INR3.4bn and take up land acquisition with the help of the state government of Andhra Pradesh.
Total - - - - 298 - Source: Ministry of Railways, Deutsche Bank
New railways lines are under old railway return guidelines (R2C1)
The new railway lines, i.e. Tori-Shivpur, Bhupdeopur-Korichappar-Korba and Jharsuguda-Barpali, will not result in additional returns for CIL as these lines will be developed under the R2CI policy. It is important to note that this policy, which was formulated by the government in May 2011 to provide necessary support for investments in railway connectivity projects from coal and iron ore mines, does not ensure any returns on the equity invested (ROE) or permit a recovery in borrowing costs. Under the R2CI policy, it is the applicant that bears the cost of building the new railway line, and not the railways. However, for CIL the potential benefit from the proposed investment is the attractive incremental volume growth (~290mt) arising from the evacuation of the inventory via the new railway lines.
Incremental volume to push up valuation
Our sensitivity test of incremental volume on the NAV suggests significant upside. Our sensitivity analysis factors in incremental production volume from FY18E onwards. We have run our sensitivity test for volume increments of ~50mt to 200mt, and the NAV is expected to rise by 4-14% from the current level of INR391/share.
Figure 75: CIL’s NAV could move up by 4-14%
Current Revised
Volume Increment 50 75 100 125 150 175 200
Revised NAV (INR) 391 405 411 418 425 431 438 444
% increase from the current level 4 5 7 9 10 12 14Source: Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 70 Deutsche Bank AG/Hong Kong
Eastern DFC will largely cater to bulk commodities
The Eastern DFC is being planned with the objective of primarily catering for the movement of bulk commodities, especially coal and steel. The Eastern DFC would provide necessary infrastructure to the areas where there is substantial movement between the coalfields and the steel plants in the eastern region to the power stations and industries in the western and northern regions. Coal India, which has coal reserves primarily on the eastern side of India, should be a major beneficiary of the DFCs. According to media reports, Coal India has stated that close to 35% of total coal demand in the country would pass through Eastern DFCs by FY17, and the coal major itself would account for~200mt of freight movement on these lines.
Figure 76: Coal India – one of the key beneficiaries of DFCs
Mumbai
DFC Line (Parallel)
Delhi
Dankuni
Ludhiana
Feeder Line
Okha
Pipavav
Vasai Rd ThaiDiva
Valsad
Vadodara
Ahmedabad
HaziraRajkot
Kandla PortMundra Port
GandhidhamMehsanaPalanpur
Virangam
LuniJodhpur
Marwar Jn
Phulera
JaipurTundla
Agra
RewariHissar
Katni
Paricha
KanpurUnchahar
Mugalsarai
Aligarh
Panipat
Hapur
MerrutSaharanpur
AmbalaChandigarh
Gomoh
BondamundaChakradharpur
Tata Nagar
Anansol
SonNagar
DurgapurChandil
Allahabad
Harduaganj
AmritsarNagal Dam
Lines proposed to be constructed
HassanMangalore
ObulavaripalliKrishnapatnam
Paradip
HaridaspurAngul
Sukinda
KhurdaAstaranga
Dhamra Port
Bhadrak
Dighi Port MangaonIndapur
Jaigad PortKarbude
Coal India
Source: Deutsche Bank
With average lead of 600-plus km and DFC freight costs being one-third, this is a significant value driver for Coal India
The average lead distance for coal movement in India is 630km, and due to the longer distance required by certain bulk commodities, railways clearly emerge as a more cost-effective mode of transport than the road. With the proposed DFC, the average lead is likely to lower further. Meanwhile, features such as 15,000 tons of carrying capacity (vs 4,000 tons currently) and maximum speed of 100km/hour (vs an average of 26km/hr and a maximum of 75km/hr currently) are likely to ensure faster turnaround times for large bulk users like Coal India. In addition to these advantages, Indian Railways, in order to capture the lost market share on the freight front to road, is expected to offer a tariff concession of c20% on the proposed DFC, which will bring down the cost of transport for users, including CIL. As of March 2012, c26% of the coal by CIL was
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 71
dispatched by roads. Using road as the mode of transport on certain occasions could lead to a situation where costlier fuel is being burnt to carry a cheaper fuel and consumers pay more for transportation than for the price of the coal. The DFC could divert some of the load from road to rail and thus result in a lower cost to consumers.
Lastly, it allows more flexibility in pricing
The average realisation of regulated coal at CIL’s mines is about INR1,250/t. If one were to add the logistics on the average lead of 630km and the average tariff rate of INR 1.4/NTKM, the logistics cost (including various duties and levies) alone works out to INR1,150/t (90% of CIL’s realisation) for the customer. If one were to assume the key customers are likely to benefit from anywhere between a 20% and 30% lower tariff, the resultant savings are likely to be fairly high. While we concede that the entire savings go to the customer, CIL also benefits indirectly, as it is likely to get more flexibility to lower the gap between the regulated price and the cost of imported coal for consumers.
We continue to value the stock based on the average of life-of-mine DCF and P/E
We continue to value the stock based on the average of life-of-mine DCF and P/E, which yields our 12-month target price of INR345/share. Please note that we have rolled over our valuation to FY14E.
In the life-of-mine DCF methodology, we value the currently stated extractable coal reserves of 22.3bn tons. This excludes any upside from conversion of the company's remaining c.30.1bn tons of proven reserves into extractable reserves. We assume volume growth of 4% from FY14 onwards until extractable reserves become zero. We assume constant prices post-FY17 and rising costs, implying diminishing profitability. We assume a discount rate of 12.3% (a beta of 0.7, a risk-free rate of 8.1% and an equity risk premium of 6.7%). This implies a target price of INR391/share.
On P/E methodology, we have valued the regulated sales business at 14x, in line with utilities, resulting in a value of INR295/share. However, given a 17% CAGR earnings decline over FY12-14E, we value the merchant sales business at a lower exit P/E of 7x. This seems reasonable given that regional peers in China and Indonesia are trading at an average P/E of 10.5x for an average EPS CAGR decline of 10%. Please note that e-auction prices are in sync with global seaborne thermal coal prices. This results in a value of INR39/share for the merchant sales business.
The average of the life-of-mine DCF and P/E results in a target price of INR345/share and offers 15% upside potential.
Reverse DCF suggests expectations could be met
We perform a reverse-DCF analysis (three-stage) to determine the market expectation of growth as implied by the current market price (INR299/share). We have performed reverse DCF under three different scenarios:
1. Assuming price growth of 3%: Under this scenario, the market is factoring in a negative CAGR for volume of ~4% over FY15E-20E.
2. Assuming price growth of 5%: Under this scenario, the market is factoring in a negative CAGR for volume of ~5.7% over FY15E-20E.
26 April 2013
Infrastructure
Indian Railways
Page 72 Deutsche Bank AG/Hong Kong
3. Assuming volume growth of 3%: Under this scenario, the market is factoring in negative price growth of ~3.9% over FY15E-20E.
Figure 77 details our cash flow forecasts; FY13-15 is the explicit forecast period and FY16-21 is the semi-explicit period, and our terminal cash flow growth assumption is 2%.
Figure 78: Reverse DCF valuation to arrive at the current implied market price
Enterprise value INR mn % of total NPV
NPV of Stage I 359,856.21 31%
NPV of Stage II 362,413.19 32%
NPV of TV 422,885.36 37%
NPV of FCFF 1,145,154.76 100%
Net cash 747,121
Total EV 1,892,275
Per share basis Sensitivity to key assumptions
NPV of Stage I 57 Cost of Equity (%)
NPV of Stage II 57 Terminal growth rate
(%)
300 10.37 11.37 12.37 13.37 14.37
NPV of TV 67 - 312 299 288 278 270
NPV of FCFF 181 1.00 321 306 293 283 274
Net cash 118 2.00 332 314 300 288 278
Total Equity Value 300 3.00 346 324 307 294 283
4.00 364 337 317 301 288
Assumptions
Terminal growth rate (%) 2.00
Tax rate (%) 33.20
Cost of Equity (%) 12.37
Risk free rate (%) 6.70
Equity risk premium (%) 8.10
Beta 0.70
No. of shares (mn) 6,316 Source: Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 74 Deutsche Bank AG/Hong Kong
Reuters Bloomberg SHCM.BO SRCM IN
Early-cycle beneficiary; remains top mid-cap sector pick Shree Cement (SHCM), among the mid-cap cement, is the biggest beneficiary of the upcoming railway capex for the following reasons: 1) its upcoming 5mt expansion in northern India, along the upcoming rail network, is timely; 2) its entire operations and key raw material suppliers are also along the upcoming rail network, which will help reduce its logistics and input costs; and 3) its under-utilised merchant power capacity could start to derive operating leverage benefits. With 2013-15E FCF yields of more than 8%, despite sustainable capex, valuations are attractive, at an EV/t of USD108 (c.30% below replacement). SHCM remains our preferred mid-cap sector pick; Buy.
As with the GQ rollout, Shree’s 5mt expansion ahead of DFC seems timely Shree’s current 5mt expansion, ahead of the DFC and DMIC capex, seems to bear an uncanny resemblance to its series of capacity expansions (a decade ago) in northern India, ahead of the NHAI’s Golden Quadrilateral project. The current expansion – coming up in two phases – will help the company to build on its market leadership in the northern Indian region.
Continued cost leadership and industry-exceeding expansion to sustain growth The upcoming rail capex could further reduce the company’s cost of operations (already the lowest in the industry), as its logistics costs, for servicing the markets as well as sourcing raw materials, are likely to come down. This, coupled with the company’s expansions (which are in excess of the industry), and the operating leverage benefits of the merchant power business, are likely to help sustain earnings growth in the medium term.
Retaining Buy with a target price of INR5,100/share; risks We value Shree at an exit EV/EBITDA of 7.15x (25% discount to large-cap peers) to arrive at our 12-month target price of INR5,100/sh. An adverse ruling in the competition case and lower-than-expected price rises are the key risks.
Yield (net) (%) 0.7 0.9 0.5 0.5 0.5Source: Deutsche Bank estimates, company data
1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 75
Model updated:26 April 2013
Running the numbers Asia
India
Construction Materials
Shree Cement Reuters: SHCM.BO Bloomberg: SRCM IN
Buy Price (26 Apr 13) INR 4,324.15
Target Price INR 5,100.00
52 Week range INR 2,354.00 - 4,651.45
Market Cap (m) INRm 150,641
USDm 2,780
Company Profile Shree Cement is one of the largest cement producers in Rajasthan, and has the largest cement plant in northern India at a single location. Its present cement capacity is 13.5 million tons p.a., with manufacturing plants at Beawar, Ras, Khushkhera and Suratgarh in Rajasthan, and at Laksar (Roorkee) in Uttarakhand. The company follows a multi-brand strategy, and sells cement under the brands Shree Ultra, Bangur and Rockstrong.
As with the GQ rollout, Shree’s current 5mt expansion, ahead of DFC, seems timely
Shree’s current 5mt expansion, ahead of the DFC and DMIC capex, seems to bear an uncanny resemblance to its series of capacity expansions (a decade ago) in northern India, ahead of the NHAI’s Golden Quadrilateral project. The current expansion – coming up in two phases – will help the company to build on its market leadership in the northern Indian region.
Figure 79: Market share gains are likely to continue
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
0.002.004.006.008.00
10.0012.0014.0016.0018.0020.00
FY 0
3
FY 0
4
FY 0
5
FY 0
6
FY 0
7
FY 0
8
FY09
FY10
FY11
FY12
FY13
E
FY14
E
FY15
E
Capacity Production Market share (%) - RHS(mnt)(%)
Source: Company data, Deutsche Bank estimates
Continued cost leadership and in-excess-of-industry expansion to sustain growth
The upcoming rail capex could further reduce the company’s cost of operations (already the lowest in the industry), as its logistics costs for servicing the markets, as well as sourcing raw materials, are likely to come down. Please note that, for cement companies, proximity to markets or superior connectivity to logistics networks help provide an advantage on the industry cost curve – given the inherent characteristics of the product as extremely voluminous and the lowest in terms of value-added (c.35% of overall costs). As can be seen from Figure 80, Shree’s entire capacity (18.5mt capacity across Ras, Beawar, Khuskhera, Suratgarh, Jaipur and Laksar), as well as the key raw material sources (pet coke/imported coal), i.e. ports such as Kandla, Mundra, Bedi, Navlakhi, and refineries such as Jamnagar, Vadinar, Panipat, Bhatinda, are located along the DFC and the feeder routes.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 77
Figure 80: Likely to be a key beneficiary of railway capex, as its plants and markets, as
well as its raw material sources, are situated along the DFC and feeder routes
Source: Company data, Deutsche Bank
This, coupled with the company’s expansions (which are in excess of the industry), and the operating leverage benefits of the merchant power business, are likely to help sustain earnings growth in the medium term.
Figure 81: Shree’s operating costs, given the largely depreciated assets, make it
competitive ,even at merchant power tariffs of INR3/kWh
0.00
1.00
2.00
3.00
4.00
5.00
Jan-1
2
Feb-1
2
Mar-
12
Apr-1
2
May
-12
Jun-1
2
Jul-1
2
Aug-1
2
Sep-1
2
Oct-1
2
Nov-1
2
Dec-1
2
Shree Generating cost Shree Sale Rate(INR/kWh)
Source: Company data, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 78 Deutsche Bank AG/Hong Kong
Despite the sustainable capex, FCF yields, at 8%+, seem attractive
Figure 82: Despite sustainable capex, FCF, at more than INR12bn, implies attractive
The company, despite its sustained capex over the next 18 months to grow its capacity from 13.5mt to 18.5mt, is likely to generate FCF in excess of INR 12bn. This effectively implies that the stock is offering an attractive FCF yield of 8-12% over the forecast period.
Retaining Buy with a target price of INR5,100/share; risks
We value Shree at an exit EV/EBITDA of 7.15x (a 25% discount to large-cap peers) to arrive at our 12-month target price of INR5,100/share. We have not used an exit P/E multiple, given the company’s aggressive depreciation policy vs. its peers, leading to profits being understated in comparison with those of peers. At our target price, the stock would trade at a target exit EV/t of USD135, which is at a 20-35% discount to its larger peers.
Risks An adverse ruling by the higher courts in the competition case remains the key risk. Please note that CCI’s order, dated 30 July 2012, alleging contravention of provisions of the Competition Act, 2002, imposed a penalty of INR3.97bn on the company. The company is contesting this and accordingly has not made any provision for it. On the operational front, lower-than-expected price rises and demand growth are key risks.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 79
Appendix A: Indian Railways programme shows it has learnt well from the experience of other sectors
Roads have had their share of success and failure
Road capex could be seen as a good basis of comparison with rail capex. Figure 83 depicts the path the Indian road sector has taken. Like the rail sector, road sector awards picked up with the Golden Quadrilateral, which originally took place through EPC mode. Later on, with fund constraints, NHAI moved towards BOT concession awards. The big difference between NHAI and Indian Railways is that NHAI is quite clear that most of the trunk route is likely to be built through EPC, and the feeder route will be built through privatisation with identified end-users and adequate risk-return trade-off.
Figure 83: Road sector development
FY 96
FY 97 FY 99
FY 00
FY 01
FY 02
FY 04
FY 07
FY 95
NHAI operationalised
Ninth Plan Outlay Rs. 305 bn
Cess on fuel introduced, 100% FDI approved
FY 98
Foundation stone laid for NSEW
Tenth Plan Outlay Rs. 500 bn
Civil contracts awarded in GQ, Tenth Plan Outlay Rs. 500 bn
Contracts awarded on Phase V, Phase VI announced -Development of Expressways, XIth Plan Outlay - Rs. 1218 bn
BOT Toll based & SPV projects start
Annuity based projects start
PMBJP launched
FY 08
Carriage by Road Bill 2007 was passed -to make the transport system transparent and simplistic.
INR176.15bn has been targeted to be spent during FY08 for construction of projects of NHDP
NHDP Phase VII approved at an estimated cost of INR166.8bn
FY 13
Under XIth plan, building of 10609km of road length was completed. Total private-sector investment on NHDP has been INR626.29bn.
XIIth plan budgetary support for Central Sector Roads and rural roads (PMGSY) is INR1.45trn and INR1.26trn.
878km was awarded by NHAI
GMR (Kishangarh-Udaipur-Ahmedabad) and GVK (Shivpuri-Dewas) walk out their projects
FY 12
7957km was awarded by NHAI
FY 09
INR280.8bn had been targeted to be spent in FY09 for construction of various projects of NHDP.
FY 11
INR356.8bn has been targeted to be spent during the year for NHDP projects
Source: Deutsche Bank
NHAI has had its moments of pick-up and slowdown, though of late the work done by NHAI suggests that the stalled projects are getting cleared. What we would like to see from Railways is the maturity with which they can deal with problems.
Source: MORTH, Deutsche Bank Source: MORTH, Deutsche Bank
Despite reforms, the power sector still has not created a well-rounded payment structure mechanism
The Indian power sector has evolved from the nascent stage to a developing one, with various regulatory reforms initiated by the government to make the sector attractive. As presented in Figure 86, the reform measures started in 1991 were further supplemented by the enactment of the Electricity Act of 2003, open access regulations, national electricity policy and national tariff and SEB relief packages. However, fuel supply issues with less than required capex on this front have hampered the capacity addition plans of power producers. Moreover, the lack of fuel price pass-throughs for the private power projects under competitive bid has affected the viability of the plants and in return has affected the ROI. In comparison, the western and eastern corridors under the DFC programme are being awarded through EPC, which provides a stable option for developers. Also, feeder routes/last mile connectivity projects provide an attractive opportunity, with the cap of a 14% rate of return on investment being abolished.
Figure 86: Developments in power sector
1992
1995 20081991
Sector opens up for private sector participation
1. 8 fast track project approved2. Dhabol power plant (Enron) initiated in 1992
1. Guidelines for pvt sector participation in the power plant R&M2. Policy for Mega power projects of capacity 1000 MW or more and supplying power to more than one state introduced
1998
Setting up of CERC
Closing of Dhabol plant
2001
MOP and RBI's Tripartite agreement for one- time settlement of dues of INR420bn of SEBs
2003
Electricity Act 2003- De-licensing thermalgeneration and to allow open access tousher in a competitive era.
2004
Nation Tariff Policy passed -covered calculation of cross subsidy under open acess and the competitive bidding route for pvt. players
2006
Reliance Power IPO
MoEF forested areas under two categories Go and No-Go - areas. Barred mining in 203 coal blocks
2009
SEB losses at 0.9% of GDP
2010
SEB Reform Package of INR1.9trn by the government
2012
"Compensatory tariff " for Aani Power 's imported coal based plant by CERC
2013
Source: Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 81
Figure 87: Power capacity addition
0
5,000
10,000
15,000
20,000
25,000
30,000
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
Capacity addition(MW)
Source: CEA, Deutsche Bank
Ports started with a bang – but railway and regulatory hurdles have dragged down the sector
What started in the late 1990s as a policy which allowed a pass-through of revenue share slowly moved to a cost-plus regime of capital cost and O&M. Later, the regulators unveiled their norms and returns were dependent on the ability of the developer to meet or beat the norms. The tariff is set based on capping the ROCE at 16%. In comparison, the return cap under PPP for feeder routes does not exist.
Figure 88: Developments in ports sector
2008
National Maritime Development Programme -proposed envisages various port capacity improvements and hinterland connectivity projects across Major Ports
2000 2009
2010
2011
2013
1. Model Concession Agreement approved by Govt-a Port Trust can directly approach the inter-ministerial PPPAppraisal Committee for final project approval 2.TAMP guidelines (for new BOT) provided an upfront cap for starting tariffs of private terminal on the basis of capital costs, operating costs, and optimum terminal capacity
1. Introduced perspective plan for the next 10 years. Maritime Agenda 2010–2020 replaced the NMDP2. Investment of INR1.09trn required in major ports in three phases by 2020
Allowed foreign feeder vessels at the International Container Transshipment Terminal at Vallarpadam by relaxing the Mercantile Shipping Act of 1958.
1. Policy for preventing privatesector monopoly in MajorPorts August, 2010
2.Land Policy for MajorPorts, 2010
1. Ministry of Shipping (ports) formed through bifurcation erstwhile Ministryof Surface Transport.
2. JV of PSA Corp (Singapore) and SICAL establish second pvt. sector container Terminalat Tuticorin Port
1. Draft Ports Regulatory AuthorityBill, 2011 -establishment of RegulatoryAuthorities to regulate rates 2.Draft Captive Port Policy, 2011-empowering the major ports and making them morecompetitive
2011
1. Government allowed private sectorparticipation in port development
2. Maharashtra Maritime Board constituted
1996
1.Guideline for foreign investment in port sector further liberalised- Automatic approval to be accorded for foreign equity participation upto 74% of construction activities 2. TAMP set up to regulatetariffs for major ports
1997
Coastal Regulation Zone Act passed leading to creation of Coastal Regulatory Zone Authority requiringcompliance of all Greenfield port projects.
1991
Multimodal Transportation of Goods Act is passed with a view to rationalize customs documentationprocedures
1993
Tamil Nadu Port Department converted into Tamil Nadu MaritimeBoard to be entrusted with the responsibility for development of minor ports in thestate.
1993
1. Gujarat Infrastructure Development Act passed paving way for privatization ofport sector in the State.2. First-ever BOT project involving private sector port developer P&O Ports (Australia) - NhavaSheva International Container Terminal (NSICT) becomes operational.
1999 2002
India.s first-ever corporatised Ennore Port becomes operational.
Global tender invited for Vallarpadam International Container Terminal, Cochin; Offshore ContainerTerminal, Mumbai Port, conversion of dry bulk terminal into a container terminal, JNPT
Under TAMP guidelines of 2005 (applicable for 5 years), assured rate of return was based on ROCE of 16% (pre tax) as against ROE of return
2005 2012
Capacity addition of Major port s duirng eleventh plant was 185mt as against 1001.8mt . During XIth plan, PPP projects with capacity addition of 154.5 MT were awarded (worthINR132bn).XIIth FYP plans1055mt of port capacity to be added
Source: Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 82 Deutsche Bank AG/Hong Kong
Indian Railways offers the most promise – largely as interest is the lowest and it probably will need the highest amount of funding
Indian Railways has been on the reform path for quite a while now. However, major reforms have taken place only over the last 7-8 years, when policies like R2C1/ R3I and dedicated freight corridor projects were initiated. It is important to highlight that the policy on the privatisation of Indian Railways’ container trains and private freight terminals was probably the most significant policy towards substantial privatisation over the coming periods.
Indian Railways offers huge opportunities for investment, as the network (which was built mostly under British colonial rule) now struggles with supply disruptions and overcapacity. A look at the railway line addition clearly indicates the opportunities that are available due to under-investment in the sector. Over the last 61 years, only ~11,000km of lines were added, which translates to merely 180km per year. This indicates far less development on the line addition front than on the network inherited from the British Raj.
Figure 89: Developments in railway sector
2008
1. Framework formulated for dedicated freight corridor 2. Turnaround in railways by reporting profit 3.Policy on privatisation of Indian Railways container business
2002
2006
2010
2011 2013
Railway Amendment Act) 2008 -Compensation matrix more liberal and faster.
XIth plan target 8132 km new rail; 7148 km gauge conversion;modernize 22 stations; DFC's
XIth plan outlay projection at INR2.62trn
World Bank Approved USD975mn loan for Eastern DFC2. Participative policy R2CI (Coal and Iron ore Mines)
1. First major DFC contract (INR33bn -343km) awarded to Tata-Aldesa2. All railway fares (across all classes) hiked after a decade
1.JICA and Indian Govt. signs a loan agreement for DFC(Phase 2) with a total limit of 1.616 billion yen.2. Participative policy R3I (Not applicable to Coal and Iron ore Mines)3.Policy on Private Freight Terminal
1. Approved National Rail Vikas Yojana with an estimated investment of INR150bn -investment was proposed for Port connectivity works and improvement of the Golden Quadrilateral
1. Rail Land Development Authority (RLDA) set up - to pursue the main objectives of generating revenue and up grading railway assets.
2007
Special focus on setting up of Railway Tariff
2012
Ninth plan outlay INR454bn
1996
2000
Tenth plan outlay INR606bn
Source: Deutsche Bank
The following tables depict various initiatives taken by Indian Railways to boost private sector participation.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 83
Figure 90: Initiatives, private sector participation and identified projects by Indian
• Multi modal logistics• Budget Hotels• Food Plaza
Nature of
Projects
ExampleUneconomic
branch lines like Hill railway
Port connectivity rail projects
BOT - Annuity Dedicated freight corridor projects
Container transportation,
Wagon Investment
scheme
Inland container depots, freight
village
With Railway’s Assets
With Strategic Investor
Fixed Annuity / GTKms based payment with
builders / developers
Fixed Annuity / GTKms based payment with
builders / developers
With Lessee’s rolling assets
(except track & loco)
With Lessee’s investment (land may be given by
railways)
Increasing degree of co-operation between Public and Private sector
Port Connectivity Rail Projects in pipeline
• Haridaspur – Paradip New Line (linking iron ore
mines of Orissa & Jharkhand to Paradip port)
• Obulavaripalli-Krishnapatnam New Line (linking
Krishanapatnam Port of Andhra Pradesh) and
• Palanpur – Gandhidham (linking Kandla &
Mundhra port to North India)
Dedicated Rail Freight Corridor Project
• Eastern Corridor – from Ludhiana (North India) to
Sonnagar (Eastern India) subsequently extended to
proposed deep sea port at Kolkatta
• Western Corridor – from JNPT, Mumbai to
Tughlakabad / Dadri, Delhi interlinking the two at
Khurja
Projects identified
Container Transport
• 14 players awarded the licenses
Wagon Investment Scheme
• Received proposals for manufacturing 25 rakes at an
investment of Rs. 25 bn
Source: Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 84 Deutsche Bank AG/Hong Kong
Appendix B: Viability of DFC funding
India’s logistics emerging as among the best in the world
At present, India’s manufacturing competitiveness is seriously affected by critical bottlenecks in the transport infrastructure and by poor logistics management, leading to time delays and high transaction costs. The time taken in inland transport is too long on account of deficiencies in the road network as well as delays at the inter-state borders. The performance of the railways is improving, but it is still not possible to have assured transportation of a consignment within a given time frame. Both the vessel turnaround time and vessel waiting time to obtain berth at ports do not measure up to world standards.
Logistics costs as a percentage of gross domestic product (GDP) range from around 9% in the US to 11-12% in France and the UK and 10-15% in China, India, Japan and Singapore, as can be seen in Figure 91.
Figure 91: India has one of the highest logistics costs as a
percent of GDP
Figure 92: Good logistics is critical to a country’s
development
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
China India Singapore United Kingdom
France Japan United States
Logistics cost as % of GDP(% of GDP)
Source: Planning Commission of India, Deutsche Bank Source: Planning Commission of India, Deutsche Bank
Largely due to higher utilisation level of railway line
According to the data given by Indian Railways, we find that in high-density routes, the capacity utilisation is greater than 100%, i.e. in simple terms more trains are travelling in a line vs. the safe capacity stated by Indian Railways. The high-density integrated routes account for about 28% of the total IR route kilometres and 76% of the total freight (71% of the total passenger plus freight). These seven routes, as highlighted in Figure 93, are (i) Delhi-Howrah, (ii) Mumbai-Howrah, (iii) Delhi-Mumbai, (iv) Delhi-Guwahati, (v) Delhi-Chennai, (vi) Howrah-Chennai, and (vii) Mumbai-Chennai.
Solution is Dedicated Freight Corridor on the trunk routes
Dedicated freight corridors with an overall outlay of INR1tr (for the first phase) are the most ambitious and largest greenfield railway capex undertaken in independent India. In the first phase the project envisages connecting Delhi-Mumbai on the western
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 85
corridor and Ludhiana-Kolkata on the eastern corridor, spanning an overall length of nearly 3,300km.
Figure 93: Utilisation levels in key railways routes are
alarmingly high
Figure 94: Dedicated Freight Corridors could ease
capacity constraints on high-density trunk routes
Delhi Howrah Link: (1444 kms) CU is 112% Route Capacity: 148 rakes/day
Critical paths (567 kms) CUs are 113% to 163%
Delhi Guwahati Link: (1483 kms) CU is 80% Critical paths (492 kms) CU is
100% to 139%
Mumbai Howrah Link: (1966 kms) CU is 105%Route Capacity (Kolkata-Bina): 99 rakes/dayCritical paths (943kms) CUs are 107% - 142%
Delhi Mumbai Link: (1371 kms ) CU is 83%Route Capacity: 108 rakes/day
Critical paths (696 kms) CU is 107-127%
Mumbai Chennai Link: (1630 kms) CU is 99%Route Capacity: 189 rakes/day
Critical Paths (339 kms) CU is 112% to 145%
Delhi Chennai Link: (2045 kms) CU is 104%Critical paths (1318 kms) CU is 126-163%
Delhi
Guwahati
Kolkota
Chennai
Mumbai
Howrah Chennai Link: (1003kms) CU: 85%Route Capacity: 75 rakes/ day
North
East
South
West
Mumbai
DFC Line
Delhi
Dankuni
Ludhiana
Vasai Rd
Valsad
VadodaraAhmedabad
Mehsana
Palanpur
Marwar Jn
Phulera Tundla
Rewari
Bhaupur
Mugalsarai
Khurja
MerrutSaharanpur
Ambala
SonNagarAllahaba
Source: Ministry of Railways, Deutsche Bank Source: Dedicated Freight Corporation of India, Deutsche Bank
Improvement in freight transport
DFCs would result in improving the existing carrying capacity by modifying basic design features. The freight corridors will encompass higher design features to enable the railway to withstand heavier loads at higher speeds (100kmph vs. average 26kmph and maximum 75kmph currently). With the DFC, an enlarged dimension of the rolling stock is being proposed. The loading capacity on a DFC would improve to 15,000 tons from the present 4,000 tons. All these features will enable longer and heavier trains to use the DFCs.
26 April 2013
Infrastructure
Indian Railways
Page 86 Deutsche Bank AG/Hong Kong
Figure 95: Significant upgrade in dimensions Figure 96: Upgraded design features on DFC
4.265 m
7.1 m for Western DFC5.1 m for Eastern DFC
3200 mm 3660 mm
Single Stack Double Stack
700 m 1500 m
4000 Ton
15000 Ton
Moving Dimensions Features
Existing On DFC
Height
Width
Container Stack
Train Length
Train Load
Curvature
Traction
Up to 10 degree Up to 2.5 degree
Electrical(25 KV) Electrical(2x25 KV)
7-10 Km 40 KmStation Spacing
Absolute/Automatic with 1 Km spacing Automatic with 2 Km spacing
22.9t/25t
32.5t/25t for Track Superstructure
8.67 t/m 12 t/m
75 kmph 100 kmph
Up to 1 in 100 1 in 200
Upgraded Design Features of DFC
Existing On DFC
Axle Load
Track Loading density
Maximum Speed
Grade
Signalling
Emergency Sockets/Mobile Train Radio Mobile Train RadioCommunication
Heavier Axle Loads
Source: Ministry of Railways, Deutsche Bank Source: Dedicated Freight Corporation of India, Deutsche Bank
Incremental freight traffic to be supported by DFCs
As per the study by RITES, the traffic on the two dedicated freight corridors (eastern and western) in FY17 is expected to reach ~91mt each by FY22.
Figure 97: Traffic projections (in mtpa)
Western DFC Easter DFC
2016-17 2021-22 2016-17 2021-22
UP Direction
Food grains, Fertiliser 1.2 1.8 Power House coal 54.5 62.0
POL 0.3 0.5 Public Coal 0.6 1.0
Cement, Salt, Miscellaneous 0.4 0.8 Steel 8.2 9.7
Containers 26.6 37.8 Others 1.6 3.0
Containers (in mn TEUs) 1.9 2.7 Logistic Park 1.2 2.4
Sub-Total 28.5 40.9 Sub-Total 66.1 78.0
Down Direction
Coal, Cement, Iron & Steel 6.3 9.4 Fertilizer 0.2 0.4
Fertiliser, Foodgrains, Salt 1.6 2.6 Cement 0.8 1.5
POL 1.0 1.5 Limestone for the Steel Plants 5.0 5.0
Containers 26.6 36.4 Salt 0.7 1.0
Containers (in mn TEUs) 1.9 2.6 Others 1.6 3.0
Logistic Park 1.2 2.4
Sub-Total 35.5 49.9 Sub-Total 9.5 13.3
Total 64.0 90.8 Total 75.6 91.3Source: DFCCIL,, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 87
Appendix C: DMIC a game changer
DMIC development is tracking DFC development
The DMIC project being initiated by the government of India is aimed at leveraging the economic benefits arising from the western dedicated freight corridor. To recap, the government of India accorded ‘in principle’ approval to the DMIC project outline in August 2007. The basic idea of the project is to ensure high-impact developments within a band of 150km on either side of the alignment of the DFC.
Real estate sweetener is left for the public – courtesy of DMIC
The DMIC project is expected to open a plethora of opportunities for real estate players, as it is expected to make large tracts of land along the western corridor available for industrial and other real estate development purposes in the form of investment regions and industrial estates.
Figure 98: DMIC − Nodes for phase-1 development
Mumbai
Existing Passenger Rail Link
DFC Alignment
Nodes to be developed in DMIC Phase 1
Dadri
6
4
7
5
2
31
1 Dadri – Noida Ghaziabad IR, UP2 Manesar – Bawal IR, Haryana3 Neemrana – Khushkhera – Bhiwadi IR, Rajasthan4 Pithampur- Dhar - Mhow IR, MP5 Ahmedabad – Dholera IR, Gujarat6 Nashik– Sinnar – Igatpuri IR,Maharashtra7 Dighi Port IA, Maharashtra
Source: DMIICDC, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 88 Deutsche Bank AG/Hong Kong
Snapshot of projects to be developed
Most of the projects in the DMIC region are expected to be implemented through public-private partnership. Some of the projects coming up in the DMIC regions are given in Figure 99.
Power Projects 1,000-1,200MW Gas based project at Patan and Mehsana
1,000-1,200MW gas based project at Guna (MP)
1,000-1,200MW gas based project at Raigad and Pune
Solar Power at Neemrana (5.00 MW, 1 MW, 2.00 MW − Diesel Generator )
Development of Power Project at Greater Noida
Early Bird Projects
Rail/ Roads connectivity
Six-lane expressway from Ahmedabad to Dholera
* 4-lane road connectivity from Shirdi to Igatpuri via Sinnar;
* Connectivity by 4 lane Road and Rail of Nevali Growth center (Thane) to DFC
* Connectivity of Alewadi Port by Rail to DFC and to Alewadi Port by 4 lane road to Mumbai-Ahmadabad Highway and
*Road Link Connecting Bhiwadi – Tapokara Industrial Complex via Ajarka to Neemrana *Development of Sojat – Pali By − Pass road
Development of Greater Noida (Boraki) Railway Station as a passenger and commercial cargo hub
Metros/ transit system Metro connectivity between Gandhinagar to Ahmedabad
Mass Rapid Transit System (MRTS) between Gurgaon and Bawal
Mass Rapid Transit System (Jodhpur Pali Marwar)
Industrial parks Mega Industrial Park at Dholera SIR
*Mega Industrial Park at Shendra-Bidkin Region
*Dhule Mega Industrial Park
Water projects Water Desalination Project, Dahej
Water Supply System & Wastewater Management for Pithampur Industrial Area
Water supply project (from Tajewala)
Water supply and Waste Water Management in Jodhpur − Pali – Marwar Industrial Area
Airports Dholera International Airport
*Development of Airport near Jodhpur; *Development of Aerotropolis
Development of International Airport near Greater Noida
Economic Corridor From Pithampur to Indore Airport
Knowledge city Knowledge City in Ujjain
Development of the Knowledge City
Logistic Hub Multimodal Logistic Hub Project near Maksi and Pithampur Industrial Area
Integrated Multi Modal Logistics Hub Project at Rewari
Multi – Modal Logistics Park at Talegaon
Development of Multi Modal Logistic Hub
Development of Integrated Multi–modal Logistic Hub at Greater Noida near Dadri
Convention Centre Exhibition cum convention Centre at Panchgaon Chowk
Exhibition cum convention Centre at Aurangabad
Source: DMIC, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 89
Appendix D: Dholera – Being created on similar lines as Singapore
Creation of bigger cities
The DMIC programme is expected to attract massive interest from investors, developers and builders as new cities are proposed to be created on a larger scale. For instance, Dholera (Gujarat) will be 903sqkm in size, larger than Singapore, which is just 670sqkm. The work on Dholera is expected to commence during the current fiscal period. A significant point to note here is that the DMIC infrastructure development will be based on a public-private partnership model. With this objective in mind, the government is facilitating private investment through a policy framework, concessional agreements, viability gap funding and long-term financing through IIFCL.
Figure 100: Potential for investment in Dholera Dholera Investment Region
Total Area - 920 sq.km-Town planning is underway-Anchor tenants are in place
-MoUs have been signed for investment of INR1trn.
Investment OpportunitiesEarly Bird Projects include
-Central Spine Roads-Metro rail connectivity-Industrial Park (private)
-International airport- Eco-city projects
Dholera International Airport-Govt has reserved 75sq.km of land
Investment opportunities-Development of Airport on PPP-Cargo faciliites development-MRO-Land side development
Desalination Plant-Planning to take advantage of sea water availaibility
Central Spine- 180Km expressway to connect Ahmedabad and Bhavnagar passing through Dholera- Project cost is INR30bn
Investment opportunities-Expressway to be developed on EPC/PPP in a phased manner
Mega Industrial Parks-Planning to develop several industrial parks-Currently 30sq km of area being developed in private participation with USEL
Investment opportunities-Development of industrialand allied infra -WTPs, STPs, HVACs, Warehouses etc
Water Recyling and Reuse- To tap 500MLD of waster water available after secondary treatment
Investment opportunities-Setting tertiary treatement plants-Transmission of recycled waste water after tertiary treatment for non-portable use
Source: Government of Gujarat, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Page 90 Deutsche Bank AG/Hong Kong
Appendix E: What is the state of rail finances?
Financing of last two plan periods: FY02-07 and FY07-12E
The plan expenditure of Indian Railways is financed through three different sources, namely:
Gross Budgetary Support (GBS): Capital from General Exchequer; plus Railway Safety Fund (Indian Railways’ share in Central Road Fund);
Internal Generation of Resources;
Extra Budgetary Resources, including Market Borrowings through IRFC, PPP, States’ share etc. Also includes Bonds, Wagon Investment Schemes (WIS), Public-Private Partnership (PPP) and Green Energy Fund, state sharing, etc.
Over the last decade, Indian Railways’ target achievements vs. plan were a mixed bag. In the tenth plan, i.e. FY02-07, we had a big positive surprise. The government approved an outlay of INR606bn, and the total outlay achieved was INR847bn, about 36% higher than the approved plan outlay. From a financing side, all three elements, i.e. internal resource generation, gross budgetary support and extra budgetary resources (market borrowings), saw a big jump. The actual mobilisation of internal resources increased from INR31.1bn in 2002-03 to INR.122.06bn in 2006-07. The Total Gross Budgetary Support of INR381.63bn was higher than the earlier allocation of INR27.6bn.
Figure 101: Budgetary support stepped in as internal resource generation fell
0
10
20
30
40
50
60
70
80
V 1978-80 VI VII VIII IX X XI
Budgetary Support Internal GenerationMarket Borrowings(%)
Source: Ministry of Railways, Deutsche Bank
Things reversed in the XI Plan. The investment in the XI plan was approved for INR2,332bn, constituting INR636bn as Gross Budgetary Support, the Internal Resource component constituting INR900bn and Extra Budgetary Sources INR796bn. The financial achievement of the Plan is short of the target by INR299bn (12.9%). The
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 91
internal resource component is short by INR.181bn (20.1%) and the Extra Budgetary Sources are short by INR251.96bn (31.6%). However, the Gross Budgetary Support has exceeded the target of INR133.86bn (21%). In the XI Plan, the internal resource generation was affected due to the increase in salaries and allowances of railway employees and the additional outflow due to the increase in pension payments with the implementation of the recommendations of the VI Pay Commission in the Plan period.
One could argue XII Plan targets are over-ambitious
According to the Ministry of Railways, the requirement for the plan expenditure for railways will be met broadly by about INR3,540bn from GBS, INR2,018bn from internal resources and INR1,470bn from the Extra Budgetary Resources. The good part about financing this outlay is each category of financing is meant for a specific purpose.
Figure 102: Financing the XII Plan investment outlay
Gross Budgetary Support
(INR 3540 bn)
Dedicated freight corridor (INR 1050 bn)
Source: Deutsche Bank
Gross Budgetary Support (INR3,540bn) – The major requirement of GBS is for New Lines (INR1,223bn), Gauge Conversion, Doubling, Traffic Facilities, Rolling Stock (INR1,578bn), Workshops including Investment in PSUs/JVs/SPVs, Metropolitan Transport Projects and Inventories. Under Investment in PSUs/JVs/SPVs, the projections include investment in dedicated freight corridors (INR964bn as equity and loan and INR100bn) and IRFC (INR51bn).
Internal Resources (INR2,018bn) Internal Resources is used to finance the Capital Fund, Depreciation Reserve Fund and Development Fund. These funds are required for renewals, replacements, upgrades and modernisation of assets and repayment of the principal component of lease charges. It is primarily required for Rolling Stock, Track Renewals, S&T, Other Electrical Works, Amenities for Staff, Passenger Amenities and Other Specified Works.
Extra Budgetary Resources (EBR) (INR1,470bn) – Investment from market borrowings through bonds are utilised for the procurement of rolling stock. An amount of INR900bn was estimated in the XII Plan for this. The PPP initiatives including WIS have been projected to bring INR570bn into the railway system. Investment through PPP is likely to flow into New Lines, Traffic Facilities, Workshops including PUs, Passenger
26 April 2013
Infrastructure
Indian Railways
Page 92 Deutsche Bank AG/Hong Kong
Amenities and Rolling Stock. In addition, investment from PPP is also projected for the DFC and High-Speed Rail Project
Where are the gaps, and can those be bridged?
The quantum of GBS projected means an annual budgetary support of INR600bn vs. INR200bn at present. This seems a difficult proposition unless the government’s priorities shift dramatically in favour of rail infrastructure.
Similarly, resources expected to be raised through EBR depend heavily on IRFC borrowing and PPP. While the debt servicing costs are already touching a very high level and Indian Railways is finding it difficult to sustain this borrowing, the decision to increase market borrowings will require careful consideration. The past record of Indian Railways in raising resources through PPP is not very encouraging, and an optimistic scenario of plan investment through this route presupposes putting in place marketable policies that appeal to the private sector.
So from a railway perspective, the biggest gap at this juncture seems to be on the internal resource generation. A quick sensitivity test of the railways earnings model would show that even if we assume freight traffic growth of 7.7% and passenger traffic growth of 7%, and assume operating expenses to rise as per inflation, the total internal resources available are INR364bn, which is highly inadequate compared to the requirement of INR2,018bn, i.e. a gap of INR1,635bn.
Figure 103: Financing the XII Plan investment outlay
Source: Deutsche Bank
The total internal resources
available are INR364bn,
which is highly inadequate
compared to the requirement
of INR2,018bn, i.e. a gap of
INR1,635bn
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 93
Figure 104: Levers for Indian Railways to increase revenues
Revenue
Freight
Volume
DFC
Existing lines
Higher speed
Rolling stock addition
Double stack
Higher axle loads
Incentives for empty flow routes
Faster turnaround time
Tariff
Hike
Premium services
Passenger
Volume New lines
Tariff
Basic fare
Premium services
Express & Mail services
More TatkalCoaches
More AC services
Source: Deutsche Bank
In order to bridge the gap, some measures that can be considered by the Ministry of Railways include those listed in Figure 105.
Figure 105: Measures that are being considered to enhance internal resources
Item Amount (INR bn)
Indexing fare & freight with fuel, inflation 250
Dividend relief of 1% 60**
SRSF II 550
Operating losses (uneconomic) 71
Land & Advertisement 200
Market oriented fares 200
Fuel Efficiency surcharge 100
No addition of 1 lakh to staff strength 140
Total 1,571
** if reduced to 3% as per rly’s request, it will go up to INR120bn Source: Planning Commission of India, Deutsche Bank
The good news is that freight rates have already increased by a huge 20%-plus While passenger fares on the basic services have remained stagnant for the past eight years, Indian Railways recently announced a 20% rise in freight rates across most commodities (except iron ore). In the case of iron ore, Indian Railways has announced a c30% fall in tariffs to attract the limited volumes (volumes dipped after the government banned iron ore exports). This rise, as per most user industries, is lower than the
26 April 2013
Infrastructure
Indian Railways
Page 94 Deutsche Bank AG/Hong Kong
increase seen in the road segment (while higher than anticipated) and is hence unlikely to affect volumes for Indian Railways in any meaningful manner.
Figure 106: Recent tariff hikes on the freight front are
ensuring that at least tariffs keep pace with inflation…
Figure 107: …and should lead to net traffic receipts
jumping by 3x from the FY12 levels
Source: Ministry of Railways, Deutsche Bank Source: Ministry of Railways, Deutsche Bank
Passenger rates are being hiked through indirect measures Indian Railways revised its Tatkal service of booking train tickets in 2009, allowing a reduced advance reservation period of to days. The Tatkal charges were fixed as a percentage of the fare at the rate of 10% of basic fare for second class and 30% of basic fare for all other classes, subject to minimum and maximum charges. In 2008-09, the Tatkal scheme earned INR6.05bn. The number of seats under the Tatkal scheme increased from 5.6% of the total reserved seats in 2005-06 to 14.2% in 2008-09. This has helped enhance passenger earnings without increasing fares.
Figure 108: Passenger fares raised by >10%... Figure 109: …and earnings from ‘tatkal’ on the rise
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
Upper Class Second Class - Mail/Exp
Second Class - Ordinary
Suburban Average
Existing fare (INR/Pkm) Revised Fare (INR/Pkm)% Min Hike (RHS)
0
1000
2000
3000
4000
5000
6000
7000
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
FY06 FY07 FY08 FY09
% of Tatkal to Total Passenger earningsFull year Tatkal earnings (INR mn)
Source: Ministry of Railways, Deutsche Bank Source: Ministry of Railways, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 95
Appendix F: Comparison of railways with other modes of transport
Railways have so far matched road traffic growth since reforms
Indian Railways has recorded unprecedented incremental growth in freight traffic of 176 million tonnes in the last five years, and in FY13, the rail transporter achieved an originating freight loading of ~1,010mt. A look at the following graphs would show that in the administered price regime period of 1961-91, most users preferred roads for shipment. The road freight traffic saw a CAGR of 8.1% (FY61 – FY91) compared with the rail freight traffic CAGR of 4% over the same period. Interestingly, after the opening of the economy, thanks to the gain in market share by railways in the bulk commodities, railways have matched roadways in traffic growth.
Figure 110: Railways, surprisingly enough, have matched
freight growth of roadways in the last decade…
Figure 111: …largely driven by gaining market share in
Coal Iron Ore CementFoodgrains Fertilizers Pol Products(%)
Source: Planning Commission of India, Deutsche Bank Source: Ministry of Railways, Deutsche Bank
But railway lines now seem to be carrying an alarmingly high load
Indian Railways has a total track length of 113,611km. Of this, 88% of tracks are on concrete sleepers and 78% are Continuously Welded Rail (CWR) track. Line capacity has been severely constrained due to the introduction of more and more trains over the years. No technical aid is yet available on Indian Railways to run trains during foggy weather, which adversely affects train operations during the winter season of 2-3 months in northern India. Also, as mentioned in Appendix B, in high-density routes, the capacity utilisation is greater than 100%. As the railway lines are overloaded, the phenomenon has resulted in a shift in freight from railways to roads.
DFCs could capture incremental freight traffic
With the DFC taking shape, new corridors will reverse the trend of freight being transferred to roads, as the railways would be able to offer faster and cheaper transportation. Carrying load through rail is more efficient than roads. For instance, on rail, one freight with 59 wagons and one electric engine of 5,000-6,000 Hp, carries
26 April 2013
Infrastructure
Indian Railways
Page 96 Deutsche Bank AG/Hong Kong
~4,600 tonnes, whereas on road the same amount would require 400 trucks, with each having a 150 Hp engine and carrying a 10-tonne load.
Assuming a 35% improvement in fuel efficiency with the DFC, we believe that future energy demand will be far lower than without the DFC scenario. Without the DFC, demand for diesel is expected to rise almost five times between FY17 and FY47, as the economy would increase its reliance on freight movement by road considering the railway capacity is already saturated.
Electricity (M. KWh) 764 893 961 921 1278 1387 1395Source: Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 97
Appendix G: Important stages under land acquisition
A three-stage land acquisition process
20A
This stage involves preliminary notification, DPR preparation, identification of survey numbers of the land, gazette notification, and the proposed alignments.
After that a joint measurement survey is conducted, which super-imposes the corridors’ alignment on the map with the identified land parcels.
Once this is done, the land owners get an opportunity to object at the land acquisition offices.
20E
At this stage after the notification, only the owners whose land is to be compensated are engaged.
The relief and rehabilitation package in the case of a DFC has to match with the guidelines, if any, of the international agencies (such as JICA for the western corridor) funding the projects. This is based on both the circle rates and the market rates. Besides compensation for the land, compensation depends on the livestock owned, employment opportunities undertaken currently, tenants occupying the land, etc.
This process typically takes about 5-6 months to be completed, as some landowners are NRIs. All owners’ objections, meetings and compensation details are recorded on video.
After the compensation stage when the land comes under 20E, the central government can, if needed, proceed to start work on the site.
20F
In the case of the western corridor, 20E has been ready for over a year now, but 20F is pending for phase II as it needs the go-ahead of the Japanese authorities. In the case of the western DFC, the authorities cannot move ahead if all the above steps are not approved to the satisfaction of the Japanese lenders. Even though the Indian authorities have assured that any incremental compensation, if suggested by the Japanese authorities, would be made good when decided, they are not comfortable making an exception for a single project among the overall list of projects they are undertaking. The Relief and Rehabilitation proposal was expected to come up for hearing on 28 February as far as phase II is concerned and is likely to pass through.
26 April 2013
Infrastructure
Indian Railways
Page 98 Deutsche Bank AG/Hong Kong
Appendix H: China and India –a quick comparison
Railway line additions on the rise in China
Railway programme in China got a boost with the adoption of Long-Term Plan (MLTP) adopted in 2004 and revised upwards in 2008. Following are some of the highlights of the China’s Railway System. China has added 39,950km of railway line since 1980, which translates to 1,289km/year of addition. This is quite significant considering the freight transport has seen a significant rise since 2001 (CAGR of ~7% over 2001-2011).
Figure 113: Gradual rise in railway line addition for China
Source: China Statistical Year Book, Deutsche Bank Source: China Statistical Year Book, Deutsche Bank
On the other hand, India, which had a higher railway length of 61,240km in 1980-81 vs. China, has added merely 3,360km of line over the past 30 years. This translates to a 108km/year of line being added since 1980-81.
Figure 115 Since 1980-81, Indian Railway has added only
3,360km of lines
Figure 116: In India too, freight transport has seen a
significant rise since 2001
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980-81 2000-01 2004-05 2006-07 2008-09 2010-11
Electrified Others
(Kms)
0
100
200
300
400
500
600
700
1950
-51
1960
-61
1970
-71
1980
-81
1990
-91
2000
-01
2003
-04
2004
-05
2005
-06
2006
-07
2007
-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
Freight Net Tonne Km (bn)(NTKM bn)
6% CAGR growth (FY01-FY13)
3% CAGR growth (FY91-FY01)
Source: Ministry of Railways, Deutsche Bank Source: Ministry of Railways, Deutsche Bank
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 99
China’s Railways losing market share
In China, the railways’ share of the national transport has declined since 1978 in the freight segment due to capacity constraints on key lines. Also on the passenger segment, the decline was steeper in the initial period (1978-1995) and then it stabilized. However, in the recent period, i.e. from 2009, the railways share has again started to fall with passenger preferring civil aviation over it.
Broadly, the railway development is laggard before 2008. Lots of old railway lines have not increased their capacities for cargo transportation as more new high-speed railway lines (dedicated passenger lines) are still under construction and customers prefer roadway due to better service and more convenience.
Figure 117: Fall in railway share of the overall freight
market in China
Figure 118: Passenger segment also experiencing gradual
fall in China
0
20
40
60
80
100
120
1978
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Railways Highways Waterways Others(%)
0
20
40
60
80
100
120
1978
1980
1985
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Railways Highways Waterways Civil Aviation(%)
Source: China Statistical Year Book, Deutsche Bank Source: China Statistical Year Book, Deutsche Bank
In India, on the freight side, Indian Railways has close to 32% share of country’s freight, while remaining freight is being transported mainly through roads. As mentioned in Appendix F, Indian Railways after the opening of the economy has gained market share in the bulk commodities and the railways have matched roadways in traffic growth.
Capex plan well laid out in China
Our China infrastructure analyst (Phyllis Wang) forecasts rail infrastructure investment during 12th five-year railway plan (2011-2015) for China will be close to USD400bn (2.5tr yuan). This is 27% higher than 11th five-year plan of USD315bn (1.98tr yuan). For 2013, the budget spending for railway infrastructure construction has been pegged at Rmb520bn, which seems conservative and we see upside potential from continued government support. Phyllis Wang expects railway infrastructure spending in 2013 of Rmb550bn (6% higher than the MoR’s budget).
China’s portion is attributable
to China Deutsche Bank
Analyst infrastructure analyst
Phyllis Wang
26 April 2013
Infrastructure
Indian Railways
Page 100 Deutsche Bank AG/Hong Kong
Figure 119: China - Capex set aside for railway infra in 2013 with funding for
Rmb520bn already being resolved Central
government budget
2%
Railway construction
fund6%
Rail bond29%
Bank loan45%
Local government and
enterprises13%
Railway special fund4%
Others1%
Source: DFCCIL, Deutsche Bank
High speed railway increasing its share in China
China’s Ministry of Railway has set the current target of increasing the railway total rail network from 98,000km in 2012 to 120,000km by 2015. This would include 26,885km of high-speed line. Currently, close to 13% of the total network consist of high speed railway.
Figure 120: High speed railway increasing its presence in
China
Figure 121: High Speed railway of >300km/h on the rise
Non high-speed railway High-speed railway (>=200km)
2,423 3,844 3,844
11,4656,1236,123
8,844
15,420
0
5,000
10,000
15,000
20,000
25,000
30,000
2010A 2011A 2012E 2015E
>300km/h <300km/h(Km)
Source: Deutsche Bank Source: Deutsche Bank
Profitability of China’s railway on decline
Most old railway lines in China made money whilst most new high-speed railway lines (such as Shanghai-Beijing, Wuhan-Guangzhou) that were launched in the past few years still made loss. A look at the table shows that the profitability of the Ministry of Railways, which owned all of the network, has taken a severe hit during the recent periods.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 101
Figure 122: New railway lines has hit the profitability of
China’s Ministry of Railways
Figure 123: Rising debt level of China’s Ministry of
Railways
-10,000
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
2009 2010 2011 9M12
PAT(Rmbm)
0%
20%
40%
60%
80%
100%
120%
140%
2009 2010 2011 9M12
Net gearing
Source: Ministry of Railways, Deutsche Bank Source: Ministry of Railways ,Deutsche Bank
Pick up in ordering activity in China
According to China Infrastructure Deutsche Bank analyst (Phyllis Wang) expects more than 30 new railway projects to start construction in 2013, with total infrastructure investment of above Rmb400bn (vs. more than 20 new railway projects with investment of Rmb250-300bn in 2012). Moreover, non-railway infrastructure orders from local government are also expected to gradually pick up in 2Q13 following the local government transition.
China’s Railway on a major reform path
In a major development the Chinese government has ultimately decided to dissolve the Ministry of Railways. The administrative/ regulatory functions of ministry are being transferred to the Ministry of Transport and the commercial activity will be taken over by a newly-formed China Railway Corporation. The reshuffle of administrative and commercial functions could make it easier for China to attract private investment into the railway.
Issues with Chinese Railway System
Media reports suggest that the Ministry of Railways is sitting on a debt of Yuan 2.53tr (USD405.8bn) and debt ration is around 61%. How is this going to be managed by the newly formed entities? This is going to be a major challenge. Also, the Ministry of Railways has been marred by corruption allegation, which resulted in reshuffling the power and functions of the ministry.
26 April 2013
Infrastructure
Indian Railways
Page 102 Deutsche Bank AG/Hong Kong
Acknowledgement
The authors of this report wishes to acknowledge the contribution made by Bishnu Ram Sharma, employee of Irevna, a division of CRISIL Limited, a third-party provider to Deutsche Bank of offshore research support services.
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 103
Appendix 1
Important Disclosures Additional information available upon request
Coal India Limited COAL.BO 317.05 (INR) 25 Apr 13 NA
UltraTech Cement ULTC.BO 1,907.30 (INR) 26 Apr 13 NA
Adani Ports & SEZ Ltd APSE.NS 144.40 (INR) 25 Apr 13 NA *Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies
Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.
14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.
Important Disclosures Required by Non-U.S. Regulators
Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.
17. Deutsche Bank and or/its affiliate(s) has a significant Non-Equity financial interest (this can include Bonds, Convertible Bonds, Credit Derivatives and Traded Loans) where the aggregate net exposure to the following issuer(s), or issuer(s) group, is more than 25m Euros.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Manish Saxena
26 April 2013
Infrastructure
Indian Railways
Page 104 Deutsche Bank AG/Hong Kong
Historical recommendations and target price: Larsen & Toubro Ltd (LART.BO) (as of 4/26/2013)
1
2
3
4 5
6
7 8
0.00
200.00
400.00
600.00
800.00
1,000.00
1,200.00
1,400.00
1,600.00
1,800.00
2,000.00
Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13
Sec
uri
ty P
rice
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13
Sec
uri
ty P
rice
Date
Previous Recommendations
Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating
Current Recommendations
Buy Hold Sell Not Rated Suspended Rating
*New Recommendation Structure as of September 9,2002
1. 17/04/2013: Upgrade to Buy, Target Price Change INR172.00
26 April 2013
Infrastructure
Indian Railways
Page 106 Deutsche Bank AG/Hong Kong
Equity rating key Equity rating dispersion and banking relationships
Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes:
1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were:
Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period
55 %
38 %
7 %17 % 15 % 10 %0
50100150200250300350400450
Buy Hold Sell
Asia-Pacific Universe
Companies Covered Cos. w/ Banking Relationship
26 April 2013
Infrastructure
Indian Railways
Deutsche Bank AG/Hong Kong Page 107
Regulatory Disclosures
1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
3. Country-Specific Disclosures
Australia and New Zealand: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act respectively. Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://www.globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name - Deutsche Securities Inc. Registration number - Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, Type II Financial Instruments Firms Association, The Financial Futures Association of Japan, Japan Investment Advisers Association. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless “Japan” or "Nippon" is specifically designated in the name of the entity. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation.
David Folkerts-Landau
Global Head of Research
Marcel Cassard Global Head
CB&S Research
Ralf Hoffmann & Bernhard SpeyerCo-Heads
DB Research
Guy AshtonChief Operating Officer
Research
Richard SmithAssociate Director Equity Research
Asia-Pacific
Fergus Lynch Regional Head
Germany
Andreas Neubauer Regional Head
North America
Steve Pollard Regional Head
International locations
Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234
Deutsche Bank AG Große Gallusstraße 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00
Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) 2203 8888
Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6770
Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000
Deutsche Bank Securities Inc. 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500
Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). The information herein is believed to be reliable and has been obtained from public sources believed to be reliable. Deutsche Bank makes no representation as to the accuracy or completeness of such information.
Deutsche Bank may engage in securities transactions, on a proprietary basis or otherwise, in a manner inconsistent with the view taken in this research report. In addition, others within Deutsche Bank, including strategists and sales staff, may take a view that is inconsistent with that taken in this research report.
Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this report. They do not necessarily reflect the opinions of Deutsche Bank and are subject to change without notice. Deutsche Bank has no obligation to update, modify or amend this report or to otherwise notify a recipient thereof in the event that any opinion, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Prices and availability of financial instruments are subject to change without notice. This report is provided for informational purposes only. It is not an offer or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst judgement.
As a result of Deutsche Bank’s March 2010 acquisition of BHF-Bank AG, a security may be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use differing methodologies to value the security; as a result, the recommendations may differ and the price targets and estimates of each may vary widely.
In August 2009, Deutsche Bank instituted a new policy whereby analysts may choose not to set or maintain a target price of certain issuers under coverage with a Hold rating. In particular, this will typically occur for "Hold" rated stocks having a market cap smaller than most other companies in its sector or region. We believe that such policy will allow us to make best use of our resources. Please visit our website at http://gm.db.com to determine the target price of any stock.
The financial instruments discussed in this report may not be suitable for all investors and investors must make their own informed investment decisions. Stock transactions can lead to losses as a result of price fluctuations and other factors. If a financial instrument is denominated in a currency other than an investor's currency, a change in exchange rates may adversely affect the investment. Past performance is not necessarily indicative of future results. Deutsche Bank may with respect to securities covered by this report, sell to or buy from customers on a principal basis, and consider this report in deciding to trade on a proprietary basis.
Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. In the U.S. this report is approved and/or distributed by Deutsche Bank Securities Inc., a member of the NYSE, the NASD, NFA and SIPC. In Germany this report is approved and/or communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is approved and/or communicated by Deutsche Bank AG London, a member of the London Stock Exchange and regulated by the Financial Services Authority for the conduct of investment business in the UK and authorized by the BaFin. This report is distributed in Hong Kong by Deutsche Bank AG, Hong Kong Branch, in Korea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch, and recipients in Singapore of this report are to contact Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch accepts legal responsibility to such person for the contents of this report. In Japan this report is approved and/or distributed by Deutsche Securities Inc. The information contained in this report does not constitute the provision of investment advice. In Australia, retail clients should obtain a copy of a Product Disclosure Statement (PDS) relating to any financial product referred to in this report and consider the PDS before making any decision about whether to acquire the product. Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10). Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published by any person for any purpose without Deutsche Bank's prior written consent. Please cite source when quoting.
